Philippine Long Distance Telephone Company 20-F 2008
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report __________
Commission file number 1-03006
Philippine Long Distance Telephone Company
(Exact name of Registrant as specified in its charter)
Republic of the Philippines
(Jurisdiction of incorporation or organization)
Ramon Cojuangco Building
Makati City, Philippines
(Address of principal executive offices)
Atty. Ma. Lourdes C. Rausa-Chan, telephone: +(632)
(Name, telephone, e-mail and/or facsimile number and address of Company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
* Registered on the New York Stock Exchange not for trading but only in connection with the registration of American Depositary Shares pursuant to the requirements of such stock exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as at the close of the period covered by the annual report.
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: Yes [ ] No [√]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [√] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filed. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [√] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP [ ]
International Financial Reporting Standards as issued by the International Accounting Standards Board [√]
Other [ ]
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 [ ] Item 18 [ ]
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [√]
TABLE OF CONTENTS
Unless the context indicates or otherwise requires, references to we, us, our or PLDT Group mean Philippine Long Distance Telephone Company and its consolidated subsidiaries, and references to PLDT mean Philippine Long Distance Telephone Company, not including its consolidated subsidiaries (see Note 2 Summary of Significant Accounting Policies and Practices to the accompanying audited consolidated financial statements in Item 18 for a list of these subsidiaries, including a description of their respective principal business activities).
Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
All references to the Philippines contained in this report mean the Republic of the Philippines and all references to the U.S. or the United States are to the United States of America.
In this report, unless otherwise specified or the context otherwise requires, all references to pesos, Philippine pesos or Php are to the lawful currency of the Philippines, all references to dollars, U.S. dollars or US$ are to the lawful currency of the United States, all references to Japanese yen, JP¥ or ¥ are to the lawful currency of Japan, and all references to Euro or are to the lawful currency of the European Union. Unless otherwise indicated, translations of peso amounts into U.S. dollars in this report were made based on the volume weighted average exchange rate quoted through the Philippine Dealing System, which was Php41.411 to US$1.00 on December 31, 2007. On April 3, 2007, the volume weighted average exchange rate quoted was Php41.552 to US$1.00.
In this report, each reference to:
• ACeS Philippines means ACeS Philippines Cellular Satellite Corporation, our wholly-owned subsidiary;
• AIL means ACeS International Limited, a 36.99%-owned associate of ACeS Philippines;
• Airborne Access means Airborne Access Corporation, a 51%-owned subsidiary of ePLDT;
• BCC means Bonifacio Communications Corporation, our 75%-owned subsidiary;
• BSP means Bangko Sentral ng Pilipinas;
• ClarkTel means PLDT Clark Telecom, Inc., our wholly-owned subsidiary;
• CyMed means CyMed, Inc., a wholly-owned subsidiary of SPi;
• Digital Paradise means Digital Paradise, Inc., a 75%-owned subsidiary of ePLDT;
• DSL means digital subscriber line;
• ePLDT means ePLDT, Inc., our wholly-owned subsidiary;
• ePLDT Ventus means the umbrella brand name for ePLDTs customer interaction services, including Ventus, Vocativ and Parlance;
• First Pacific means First Pacific Company Limited;
• First Pacific Group means First Pacific and its Philippine and other affiliates;
• GAAP means generally accepted accounting principles;
• GSM means global system for mobile communications;
• I-Contacts means I-Contacts Corporation, a wholly-owned subsidiary of Smart;
• IFRS means International Financial Reporting Standards as issued by the International Accounting Standards Board;
• Infocom means Infocom Technologies, Inc., a 99.6%-owned subsidiary of ePLDT;
• Level Up! means Level Up!, Inc., a 60%-owned subsidiary of ePLDT;
• Mabuhay Satellite means Mabuhay Satellite Corporation, our 67%-owned subsidiary;
• Maratel means PLDT-Maratel, Inc., our 97.5%-owned subsidiary;
• netGames means netGames, Inc., an 80%-owned subsidiary of ePLDT;
• NTC means the National Telecommunications Commission of the Philippines;
• NTT means Nippon Telegraph and Telephone Corporation;
• NTT Communications means NTT Communications Corporation, a wholly-owned subsidiary of Nippon Telegraph and Telephone Corporation;
• NTT DoCoMo means NTT DoCoMo, Inc., a majority-owned and publicly traded subsidiary of Nippon Telegraph and Telephone Corporation;
• NTTC-UK means NTT Communications Capital (UK) Ltd., a wholly-owned subsidiary of NTT Communications;
• PAPTELCO means Philippine Association of Private Telephone Companies, Inc.;
• Parlance means Parlance Systems, Inc., a wholly-owned subsidiary of ePLDT;
• PFRS means Philippine Financial Reporting Standards;
• Piltel means Pilipino Telephone Corporation, a 92.1%-owned subsidiary of Smart;
• PLDT Beneficial Trust Fund means the beneficial trust fund created by PLDT to pay the benefits under the PLDT Employees Benefit Plan;
• PLDT Global means PLDT Global Corporation, our wholly-owned subsidiary;
• SEC means the Securities and Exchange Commission;
• SIM means subscriber identification module;
• SMS means short messaging service;
• Smart means Smart Communications, Inc., our wholly-owned subsidiary;
• SBI means Smart Broadband, Inc., our wireless broadband provider and a wholly-owned subsidiary of Smart;
• SPi means SPi Technologies, Inc., a wholly-owned subsidiary of ePLDT;
• SPi Group means SPi and its subsidiaries;
• SubicTel means PLDT Subic Telecommunications Company, Inc., our wholly-owned subsidiary;
• VAS means value-added service;
• VAT means value-added tax;
• Ventus means ePLDT Ventus, Inc., a wholly-owned subsidiary of ePLDT;
• Vocativ means Vocativ Systems, Inc., a wholly-owned subsidiary of ePLDT;
• WAP means wireless application protocol;
• W-CDMA means wireless-code division multiple access; and
• Wolfpac means Wolfpac Mobile, Inc., our wireless content operator and a wholly-owned subsidiary of Smart.
Some information in this report may contain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current beliefs, expectations and intentions as to facts, actions and events that will or may occur in the future. Such statements generally are identified by forward-looking words such as believe, plan, anticipate, continue, estimate, expect, may, will or other similar words.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We have chosen these assumptions or bases in good faith. These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual results may differ materially from information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors set forth in Item 3. Key Information Risk Factors. When considering forward-looking statements, you should keep in mind the description of risks and other cautionary statements in this report.
You should also keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as at the date on which we made it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the statements in this report after the date hereof. In light of these risks and uncertainties, you should keep in mind that actual results may differ materially from any forward-looking statement made in this report or elsewhere.
PRESENTATION OF FINANCIAL INFORMATION
Our consolidated financial statements as of and for the years ended December 31, 2007 and 2006 included in this Annual Report on Form 20-F have been prepared in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). We adopted IFRS effective as of and for the fiscal year ended December 31, 2007 by applying IFRS 1: First-Time Adoption of International Reporting Standards. Our consolidated financial statements as at and for the year ended December 31, 2006 were originally prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and were restated in accordance with IFRS for comparative purposes only. An explanation of how the transition to IFRS from U.S. GAAP has affected our reported financial position, financial performance and cash flows is provided in Note 2 Summary of Significant Accounting Policies and Practices First-time Adoption and Transition to IFRS in the accompanying audited consolidated financial statements in Item 18.
In accordance with rule amendments adopted by the U.S. Securities Exchange Commission, or U.S. SEC, which became effective on March 4, 2008, we do not provide a reconciliation to U.S. GAAP. Furthermore, pursuant to the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have omitted in this Annual Report on Form 20-F financial statements and financial information for the year ended December 31, 2005.
The consolidated financial statements included in our Annual Reports on Form 20-F filed with the U.S. SEC in respect of the years ended December 31, 2006, 2005, 2004, 2003 and 2002 were prepared in conformity with U.S. GAAP and, prior to that, in conformity with PFRS.
IFRS differs in certain significant aspects from U.S. GAAP and PFRS. As a result, our financial information presented under IFRS is not directly comparable to our financial information presented in our previous Annual Reports on Form 20-F filed with the U.S. SEC.
The selected consolidated financial information below as of and for the years ended December 31, 2007 and 2006 should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements, including the notes, included elsewhere in this Annual Report. As disclosed above under Presentation of Financial Information, our consolidated financial statements as at, and for the years ended, December 31, 2007 and 2006 have been prepared and presented in conformity with IFRS.
The selected consolidated financial information below as at and for the years ended December 31, 2005, 2004, and 2003 is based on financial statements prepared and presented in conformity with U.S. GAAP and should be read in conjunction with, and is qualified in its entirety by reference to, such consolidated financial statements, including the notes, included in our previous Annual Report for the fiscal year ended December 31, 2006 filed with the U.S. SEC on June 27, 2007.
Therefore, data for 2005, 2004 and 2003 are not comparable with data for 2007 and 2006 and are presented separately.
Amounts in conformity with IFRS:
Amounts in conformity with U.S. GAAP:
(1) We maintain our accounts in Philippine peso. For convenience, the peso financial information as at and for the year ended December 31, 2007, has been translated into U.S. dollars at the exchange rate of Php41.411 to US$1.00, the rate quoted through the Philippine Dealing System as at December 31, 2007. This translation should not be construed as a representation that the Philippine peso amounts represent, or have been or could be converted into, U.S. dollars at that rate or any other rate.
(2) Total debt represents current portion of long-term debt, long-term debt net of current portion and notes payable.
(3) Total liabilities on a consolidated basis represent the difference between total assets and minority interest in consolidated subsidiaries, preferred stock subject to mandatory redemption and stockholders equity.
(4) For purposes of this ratio, Earnings consist of: (a) pre-tax income from continuing operations before adjustment for minority interest in consolidated subsidiaries or income or loss from equity investees, (b) fixed charges, (c) amortization of capitalized interest, (d) distributed income of equity investees, and (e) share of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges; less the sum of the following: (1) capitalized interest, (2) preference security dividend requirements of consolidated subsidiaries, and (3) the minority interest in pre-tax income of subsidiaries that have not incurred fixed charges
Fixed charges consist of interest expensed and capitalized interest, amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of interest within rental expense, and preference security dividend requirements of consolidated subsidiaries.
The following table summarizes PLDTs capital stock outstanding as at December 31, 2007 and 2006:
(1) Preferred stock subject to mandatory redemption in 2008 (see Note 18 Interest-bearing Financial Liabilities Preferred Stock Subject to Mandatory Redemption to the accompanying audited consolidated financial statements in Item 18 for further discussion).
The table sets forth dividend declarations on shares of PLDTs common stock in 2007 and 2006:
Our current policy is to declare and pay dividends taking into consideration the interests of our shareholders as well as our working capital, capital expenditures and debt servicing requirements. Also taken into consideration are our ability to meet loan covenant requirements in the declaration and payment of dividends as discussed in Note 17 Equity and Note 18 Interest-bearing Financial Liabilities to the accompanying audited consolidated financial statements in Item 18. The retention of earnings is necessary to meet the funding requirements of our business expansion and development programs. Unappropriated retained earnings of PLDT include undistributed earnings representing accumulated equity in the net earnings of our subsidiaries, which are not available for distribution as dividends until received in the form of dividends from such subsidiaries (see Note 17 Equity to the accompanying audited consolidated financial statements in Item 18). Dividends are generally paid in Philippine pesos. In the case of shareholders residing outside the Philippines, PLDT's transfer agent in Manila, which acts as the dividend-disbursing agent, converts the peso dividends into U.S. dollars at the prevailing exchange rates, and remits the dollar proceeds abroad, net of applicable withholding tax.
A summary of dividends paid per share of PLDT's common stock stated in both Philippine peso and U.S. dollars follows:
Note: Dividends on PLDT's common stock were declared and paid in Philippine peso. For the convenience of the reader, the peso dividends are translated into U.S. dollars based on exchange rates on the respective dates of dividend payments.
The Philippine government does not administratively fix the exchange rate between the Philippine peso and the U.S. dollar. Since August 1, 1992, a market average rate has been determined daily in inter-bank trading using the Philippine Dealing System, known as the Philippine Dealing System Reference Rate. The Philippine Dealing System is a specialized off-floor direct dealing service for the trading of Philippine pesos-U.S. dollars by member banks of the Bankers Association of the Philippines and BSP, the central bank of the Philippines. All members of the Bankers Association of the Philippines are required to make their Philippine peso-U.S. dollar trades through this system, which was established by Telerate Financial Information Network of Hong Kong.
The following shows the exchange rates between the Philippine peso and the U.S. dollar, expressed in pesos per U.S. dollar, for the periods indicated, based on the volume-weighted average exchange rate for each business day in each of the periods presented:
Source: Philippine Dealing System Reference Rate
(1) Simple average of exchange rates for the period.
(2) Highest exchange rate for the period.
(3) Lowest exchange rate for the period.
Source: Philippine Dealing System Reference Rate
(1) Simple average of exchange rates for the month.
(2) Highest exchange rate for the month.
(3) Lowest exchange rate for the month.
This report contains conversions of Philippine peso amounts into U.S. dollars for your convenience. Unless otherwise specified, these conversions were made at the exchange rate as at December 31, 2007 of Php41.411 to US$1.00. You should not assume that such peso amounts represent such U.S. dollar amounts or could have been or could be converted into U.S. dollars at the rate indicated, or at any particular rate. As at April 3, 2008, the exchange rate quoted through the Philippine Dealing System was Php41.552 to US$1.00.
Risks Relating to Us
We face competition from well-established telecommunications operators and may face competition from new entrants that may adversely affect our business, results of operations, financial condition and prospects
The Philippine government has liberalized the Philippine telecommunications industry and opened up the Philippine telecommunications market to new entrants. Including the PLDT Group, there are nine major local exchange carriers, seven international gateway facility providers and five cellular service providers in the country. Many new entrants into the Philippine telecommunications market have entered into strategic alliances with foreign telecommunications companies, which provide them access to technological and funding support as well as service innovations and marketing strategies. Consequently, we are facing increasing competition in major segments of the telecommunications industry, particularly data and other network services segments. There can be no assurance that the number of providers of telecommunication services will not further increase or that competition for telecommunications customers will not lead our cellular and fixed line subscribers to switch to other operators or lead us to increase our marketing expenditures or reduce our rates, resulting in a reduction in our profitability.
Competition in the cellular telecommunications industry in the Philippines is based primarily on factors such as network coverage, quality of service and price. Recently, competition has increased as operators sought to develop and maintain market share and to attract new subscribers. Our principal cellular competitors, Globe Telecom, Inc., or Globe, and Digital Telecommunications Philippines, Inc., or Digitel, have introduced aggressive marketing campaigns and promotions. In addition, the government may allocate additional frequencies and award additional cellular telecommunications licenses in the future which could lead to increased competition.
As a result of the competitive environment, Smart has not increased its cellular rates since November 1998. Moreover, the level of competition requires Smart to continuously innovate its products and to conduct promotions, which may affect its cellular revenues and revenue growth. For example, in order to test the market demand for fixed rate or bucket plans for voice and text services and in response to similar types of promotions launched by its competitors, Smart launched promotions pursuant to which Smart and Talk N Text prepaid subscribers had the option to avail themselves of unlimited on-network (Smart-to-Smart) voice calls or unlimited on-network (Smart-to-Smart) text messages at a fixed rate.
There can be no assurance that incurring additional marketing expenses for these promotions and responding to rate pressures and the potential loss of customers will not have a material adverse effect on our financial performance.
The cellular telecommunications industry may not continue to grow
The majority of our total revenues are currently derived from cellular services. As a result, we depend on the continued development and growth of the cellular telecommunications industry. The cellular penetration rate in the Philippines is estimated to have reached over 60%. As such, our cellular business is expected to grow at a slower rate as the penetration rate increases, an increasing number of subscribers own multiple SIM cards and Smart moves further into the lower-income segments of the market. The growth of the cellular communications market depends on many factors beyond our control, including the continued introduction of new and enhanced cellular devices, the price levels of cellular handsets, consumer preferences and amount of disposable income of existing and potential subscribers. Any economic, technological or other developments resulting in a reduction in demand for cellular services may harm our business.
Rapid changes in telecommunications technology may adversely affect the economics of our existing businesses and the value of our assets, increase our required capital expenditures and create new competition
The telecommunications sector has been characterized recently by rapid technological changes. There can be no assurance that these developments will not result in competition from providers of new services or the need to make substantial capital expenditures to upgrade our facilities. Furthermore, the NTC has issued to Smart and our competitors licenses covering 3G cellular services, and we have incurred significant expenses in the rollout of these services. We are also rolling out a wireless broadband network and continuing to upgrade to a next generation, all-IP network in order to expand our capability to provide broadband services. These projects require and will continue to require significant capital expenditures over the next few years.
Our future success will depend, in part, on our ability to anticipate or adapt to such changes and to offer services that meet customer demands on a competitive and timely basis. We may be unable to obtain new technologies on a timely basis or on satisfactory terms or implement them in an appropriate or effective manner. Future development of new technologies, services or standards could require significant changes to our business model, which could negatively impact our existing businesses and could necessitate new investments. In addition, new products and services may be expensive to develop and may result in increased competition. Such strategic initiatives and technological developments could require us to incur significant additional capital expenditures. There can be no assurance that we would be able to adopt and successfully implement new technologies. In addition, there can be no assurance on how emerging and future technological changes will affect our operations or the competitiveness of our services.
Our financial position could be materially and adversely affected if the Philippine peso significantly fluctuates against the U.S. dollar
Substantially all of our indebtedness and related interest expense, a substantial portion of our capital expenditures and a portion of our expenses are denominated in U.S. dollars and other foreign currencies, but a significant portion of our revenues is denominated in Philippine pesos. As at December 31, 2007, 88% of our total consolidated indebtedness was foreign currency-denominated, of which approximately 45% was unhedged.
A depreciation of the Philippine peso against the U.S. dollar increases the amount of our debt obligations and operating and interest expenses in peso terms. In the event that the Philippine peso depreciates against the U.S. dollar, we may be unable to generate enough funds through operations and other means to offset the resulting increase in our obligations in peso terms. These changes could cause us not to be in compliance with the financial covenants imposed by our lenders under certain loan agreements and other indebtedness. Further, fluctuations in the Philippine peso value and of interest rates impact the mark-to-market gains/losses of certain of our financial debt instruments which were designated as non-hedged items.
On the other hand, approximately 38% of PLDT Groups consolidated service revenues are either denominated in U.S. dollars or is linked to the U.S. dollar. In this respect, an appreciation of the Philippine peso against the U.S. dollar reduces our revenues in peso terms and reduces our cash flow from operations.
The Philippine peso has been subject to significant fluctuations in recent years. From 2003 to 2005, the Philippine peso generally depreciated from a high of Php52.021 on May 8, 2003 to a low of Php56.443 on October 14, 2004. In 2005, the peso fluctuated significantly from a low of Php56.321 on July 8 to a high of Php53.062 on December 29, 2005. While the peso appreciated in 2006 and continued to appreciate in 2007, there can be no assurance that the peso will not depreciate and be subject to significant fluctuations going forward due to a range of factors, including:
• political and economic developments affecting the Philippines;
• global economic trends;
• the volatility of regional currencies, particularly the Japanese yen;
• any interest rate increases by the Federal Reserve Bank of the United States;
• higher demand for U.S. dollars by both banks and domestic businesses to service their maturing U.S. dollar obligations; and
• foreign exchange traders including banks covering their short U.S. dollar positions.
Our results of operations have been, and may continue to be, adversely affected by competition in, and the emergence of new services which may put additional pressure on, our traditional international and national long distance services
The international long distance business has historically been one of our major sources of revenue. However, due to competition and the steep decline in international settlement rates that are paid to us by foreign telecommunications carriers for termination of international calls on our network, revenues generated from our international long distance business have overall declined in recent years.
We anticipate that revenues from international long distance and international data services, including our services, will continue to decline in the future, due primarily to:
• increased competition from other domestic and international telecommunications providers;
• advances in technology;
• alternative providers offering internet telephony, also known as Voice over Internet Protocol, or VoIP, and broadband capacity; and
• unauthorized traffic termination and bypass routings by international simple resale operators.
The continued increase in cellular penetration in the Philippines and the prevalence of SMS has negatively impacted our national long distance business in recent years. There can be no assurance that we will be able to generate new revenue streams that may fully offset the declines in our traditional fixed line long distance businesses or that these declines will not materially and adversely affect our financial performance.
Net settlement payments between PLDT and other foreign telecommunications carriers for origination and termination of international call traffic between the Philippines and other countries have been our predominant source of foreign currency revenues. However, in U.S. dollar terms, these payments have been declining in recent years. A continued decline in our foreign currency revenues could increase our exposure to risks from possible future declines in the value of the Philippine peso against the U.S. dollar. We cannot assure you that we will be able to achieve adequate increases in our other revenues to make up for any adverse impact of a further decline in our net settlement payments.
We may not be successful in our acquisitions of and investments in other companies and businesses, and may therefore be unable to implement fully our business strategy
As part of our growth strategy, we may, from time to time, make acquisitions and investments in companies or businesses. The success of our acquisitions and investments depends on a number of factors, including:
• our ability to identify suitable opportunities for investment or acquisition;
• our ability to reach an acquisition or investment agreement on terms that are satisfactory to us or at all;
• the extent to which we are able to exercise control over the acquired company;
• the economic, business or other strategic objectives and goals of the acquired company compared to those of the PLDT Group; and
• our ability to successfully integrate the acquired company or business with our existing businesses.
Any of our contemplated acquisitions and investments may not be consummated due to reasons or factors beyond our control. Even if any contemplated acquisitions and investments are consummated, we may not be able to realize any or all of the anticipated benefits of such acquisitions and investments. Moreover, if we are unsuccessful in our contemplated acquisitions and investments, we may not be able to implement fully our business strategy to maintain or grow certain of our businesses.
Our debt instruments contain restrictive covenants which require us to maintain certain financial tests and our indebtedness could impair our ability to fulfill our financial obligations, service our other debt and carry out new financings or pay dividends
As at December 31, 2007, we had consolidated total indebtedness of approximately Php60,640 million (US$1,464 million), and a consolidated ratio of debt to equity (total debt on a consolidated basis divided by total equity) of 0.54x. Our existing debt instruments contain covenants which, among other things, require PLDT to maintain certain financial ratios calculated on the basis of PFRS on a consolidated and non-consolidated basis, limit our ability to incur indebtedness, make investments and pay dividends. For a description of some of these covenants, see Item 5. Operating and Financial Review and Prospects Liquidity and Capital Resources Financing Activities Debt Covenants.
Our indebtedness and the requirements and limitations imposed by our debt covenants could have important consequences. For example, they could:
• require us to dedicate a substantial portion of our cash flow to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements; and
• limit the availability and amount of dividend payments to our common shareholders.
The principal factors that can negatively affect our ability to comply with the financial ratios and other financial tests under our debt instruments are depreciation of the Philippine peso relative to the U.S. dollar, poor operating performance of PLDT and our consolidated subsidiaries, impairment or similar charges in respect of investments or other long-lived assets that may be recognized by PLDT and its consolidated subsidiaries and increases in our interest expenses. Since approximately 88% of our total consolidated debts were denominated in foreign currencies, principally in U.S. dollars, many of these financial ratios and other tests are negatively affected by any weakening of the peso.
We have maintained compliance with all of our financial ratios and covenants, as measured under PFRS, under our loan agreements and other debt instruments. However, if negative factors adversely affect our financial ratios, we may be unable to maintain compliance with these ratios and covenants or be unable to incur new debt. Inability to comply with the financial ratios and covenants or raise new financing could result in a declaration of default and acceleration of some or all of our indebtedness. The terms of some of our debt instruments have no minimum amount for cross-default.
If we are unable to meet our debt service obligations or comply with our debt covenants, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. An inability to effect these measures successfully could result in a declaration of default and an acceleration of some or all of our indebtedness.
In addition, we may have difficulty meeting debt payment obligations if we do not continue to receive cash dividends from Smart.
Creditors of our subsidiaries will have superior claims to our subsidiaries cash flow and assets
A growing portion of our total revenues and cash flow from operations is derived from our subsidiaries, particularly Smart. Smart and some of our other subsidiaries have significant internal cash requirements for debt service, capital expenditures and expenses and so may be financially unable to pay any dividends to PLDT. Although Smart has been making dividend payments to PLDT since December 2002, we cannot assure you that PLDT will continue to receive dividends or other distributions, or otherwise be able to derive liquidity from Smart or any other subsidiary or investee in the future.
Creditors of our subsidiaries will have prior claims to our subsidiaries assets and cash flows. We and our creditors will effectively be subordinated to the existing and future indebtedness and other liabilities, including trade payables, of our subsidiaries, except that we may be recognized as a creditor on loans we have made to subsidiaries. If we are recognized as a creditor of a subsidiary, our claim will still be subordinated to any indebtedness secured by assets of the subsidiary and any indebtedness of the subsidiary otherwise deemed senior to the indebtedness we hold.
Our businesses require substantial capital investment, which we may not be able to finance
Our projects under development and the continued maintenance and improvement of our networks and services, including Smarts projects, networks and services, require substantial ongoing capital investment. Our consolidated capital expenditures in 2007 and 2006 totaled Php24,824 million and Php20,674 million, respectively. Our 2008 budget for consolidated capital expenditures is approximately Php25 billion, of which approximately Php9 billion is budgeted to be spent by PLDT and approximately Php15 billion is budgeted to be spent by Smart; the balance represents the budgeted capital spending of our other subsidiaries. PLDTs capital spending is intended principally to finance the continued build-out and upgrade of its data and internet protocol infrastructures and for its fixed line data services and the maintenance of its network. Smarts capital spending is focused on expanding and upgrading its transmission network facilities to meet increased demand for cellular and broadband services.
Future strategic initiatives could require us to incur significant additional capital expenditures. We may be required to finance a portion of our future capital expenditures from external financing sources, which have not yet been fully arranged. There can be no assurance that financing for new projects will be available on terms acceptable to us or at all. If we cannot complete our development programs and other capital projects, our growth, results of operations and financial condition could be materially and adversely affected.
Our businesses depend on the reliability of our network infrastructure, which is subject to physical, technological and other risks
We depend to a significant degree on an uninterrupted operation of our network to provide our services. We also depend on robust information technology systems to enable us to conduct our operations. The development and operation of telecommunications networks are subject to physical, technological and other risks, which may cause interruptions in service or reduced capacity for customers. These risks include:
• physical damage;
• power loss;
• capacity limitation;
• cable theft;
• software defects; and
• breaches of security by computer viruses, break-ins or otherwise.
The occurrence of any of these risks could have a material and adverse effect on our ability to provide services to customers. While we are undertaking initiatives to prevent and/or mitigate the occurrence of said risks, including the preparation of a disaster recovery plan that aims to allow restoration of service at the soonest possible time from occurrence of an incident. There can be no assurance that these risks will not occur or that our initiatives will be effective should such risks occur.
A significant number of PLDTs shares are held by three separate shareholders, which may not act in the interests of other shareholders or stakeholders in PLDT
The First Pacific Group has beneficial ownership of approximately 26.17% in PLDTs outstanding common stock as at February 29, 2008. This is the largest block of PLDTs common stock that is directly or indirectly under common ownership.
NTT Communications, which owned 14% of PLDTs common stock as at December 31, 2005, transferred on March 14, 2006, approximately 12.6 million shares of PLDTs common stock, representing approximately 7% of the then outstanding shares of PLDTs common stock, to NTT DoCoMo pursuant to a stock sale and purchase agreement dated January 31, 2006. Since March 14, 2006, NTT DoCoMo has made additional purchases of shares of PLDT common stock and, together with NTT Communications, beneficially owns 20.86% of PLDTs common stock as at February 29, 2008. NTT Communications is a wholly-owned subsidiary, and NTT DoCoMo a majority-owned subsidiary of NTT. In connection with the above acquisition by NTT DoCoMo of shares of PLDT from NTT Communications, First Pacific and certain of its affiliates, or the FP Parties, NTT Communications, NTT DoCoMo and PLDT entered into a Cooperation Agreement, dated January 31, 2006, or the Cooperation Agreement, pursuant to which, among other things, certain rights of NTT Communications under the Stock Purchase and Strategic Investment Agreement dated September 28, 1999 and the Shareholders Agreement dated March 24, 2000 were extended to NTT DoCoMo. See Item 7. Major Shareholders and Related Party Transactions for further details regarding the shareholdings of NTT Communications and NTT DoCoMo in PLDT. As a result of the Cooperation Agreement, NTT Communications and NTT DoCoMo, in coordination with each other, have contractual veto rights over a number of major decisions and transactions that PLDT could make or enter into, including:
• capital expenditures in excess of US$50 million;
• any investments, if the aggregate amount of all investments for the previous 12 months is greater than US$25 million in the case of all investments to any existing investees and US$100 million in the case of all investments to any new or existing investees, determined on a rolling monthly basis;
• any investments in a specific investee, if the cumulative value of all investments made by us in that investee is greater than US$10 million in the case of an existing investee and US$50 million in the case of a new investee;
• issuance of common stock or stock that is convertible into common stock;
• new business activities other than those we currently engage in; and
• merger or consolidation.
Moreover, as a result of the Shareholders Agreement, the Cooperation Agreement and their respective stockholdings, the FP Parties, NTT Communications and/or NTT DoCoMo are able to influence our actions and corporate governance, including:
• elections of PLDTs directors; and
• approval of major corporate actions, which require the vote of common stockholders.
Additionally, pursuant to amendments effected by the Cooperation Agreement to the Strategic Agreement and the Shareholders Agreement, upon NTT Communcations and NTT DoCoMo and their respective subsidiaries owning in the aggregate 20% or more of PLDTs shares of common stock and for as long as they continue to own in the aggregate at least 17.5% of PLDTs shares of common stock then outstanding, NTT DoCoMo has additional rights under the Strategic Agreement and Shareholders Agreement, including that:
• NTT DoCoMo is entitled to nominate one additional NTT DoCoMo nominee to the board of directors of each of PLDT and Smart;
• PLDT must consult NTT DoCoMo no later than 30 days prior to the first submission to the board of PLDT or certain of its committees of any proposal of investment in an entity that would primarily engage in a business that would be in direct competition or substantially the same business opportunities, customer base, products or services with business carried on by NTT DoCoMo, or which NTT DoCoMo has announced publicly an intention to carry on;
• PLDT must procure that Smart does not cease to carry on its business, dispose of all of its assets, issue common shares, merge or consolidate, or effect winding up or liquidation without PLDT first consulting with NTT DoCoMo no later than 30 days prior to the first submission to the board of PLDT or Smart, or certain of its committees; and
• PLDT must first consult with NTT DoCoMo no later than 30 days prior to the first submission to the board of PLDT or certain of its committees for the approval of any transfer by any member of the PLDT Group of Smart common capital stock to any person who is not a member of the PLDT Group.
Pursuant to public filings made with the U.S. SEC by NTT Communications and NTT DoCoMo, as at February 29, 2008, NTT Communications and NTT DoCoMo together beneficially owned 20.86% of the outstanding shares of PLDTs common stock.
The FP Parties and/or NTT Communications and/or NTT DoCoMo may exercise their respective influence over these decisions and transactions in a manner that could be contrary to your interests.
If a major shareholder sells its interest in PLDT, the transaction may result in an event of default under certain circumstances
If First Pacific Group or NTT Communications sell all or a portion of their equity interest in PLDT, in certain circumstances, such sale may give rise to an obligation for PLDT to make an offer to purchase its outstanding debt under its US$250 million 11.375% notes due 2012. As at December 31, 2007, Php10,353 million in principal amount of PLDTs indebtedness is directly subject to a change in major shareholding or offer to purchase requirement. In such event, if PLDT fails to complete an offer to purchase the affected debts, all of its debt could become immediately due and payable as a result of various cross-default provisions.
The franchise of Smart may be revoked due to its failure to conduct a public offering of its shares
In order to diversify the ownership base of public utilities, the Philippine Public Telecommunications Policy Act, or R.A. 7925, requires a telecommunications entity with regulated types of services to make a public offering through the stock exchanges representing at least 30% of its aggregate common shares by the later of (i) the fifth anniversary of the date the law became effective; and (ii) the fifth anniversary of the date of the entitys commencement of commercial operations. As Smart has not conducted a public offering of its shares, the Philippine Congress may revoke the franchise of Smart for its failure to comply with the requirement under R.A. 7925 on the public offering of its shares. A quo warranto case may also be filed against Smart by the Office of the Solicitor General of the Philippines for the revocation of the franchise of Smart on the ground of violation of R.A. 7925.
Smart maintains the position that it has not violated the provision in its franchise to make a public offering of its shares within a certain period, since it believes such provision is merely directory. Further, the policy underlying the requirement for telecommunications entities to conduct a public offering should be deemed of having been achieved when PLDT acquired a 100% equity interest in Smart in 2000, given the fact that PLDT was then and continues to be a publicly listed company. In September 2004, Senate Bill No. 1675 was filed seeking to declare that a telecommunication entity shall be deemed to have complied with the requirement of making a public offering of its shares if two-thirds of its outstanding voting stock are owned and controlled directly or indirectly, by a listed company. This bill is currently pending in Congress. However, there can be no assurance that such bill will be enacted or that Philippine Congress will not revoke the franchise of Smart or the Office of Solicitor General of the Philippines will not initiate a quo warranto proceeding against Smart for the revocation of its franchise for failure to comply with the provision under R.A. 7925 on the public offering of shares.
We operate our business under franchises, each of which is subject to amendment, termination or repeal by the Philippine Congress. Additionally, PLDT operates pursuant to various provisional authorities and certificates of public convenience and necessity, or CPCNs, which are granted by the NTC and expire between now and 2028. Some of PLDTs CPCNs and provisional authorities have already expired. However, PLDT filed applications for extension of these CPCNs and provisional authorities prior to their respective expiration dates and is therefore entitled to continue to conduct its business under its existing CPCNs and provisional authorities pending the NTCs decisions on these extensions. Smart also operates its cellular, international long distance, national long distance and global mobile personal communications via satellite services pursuant to CPCNs, which will expire upon the expiration of its franchise. Smarts franchise is due to expire on March 27, 2017, 25 years after the date on which its current franchise was granted. Smart operates international private leased circuits under a provisional authority, which expired on November 6, 2006. Smart applied for an extension of this provisional authority or for the issuance of a CPCN prior to its expiration. The NTC has not yet acted on the motion. Because PLDT and Smart filed the applications for extension on a timely basis, we expect that these extensions will be granted. However, there can be no assurance that the NTC will grant these extensions. If a CPCN has not been issued, the NTC may permit an operator to provide services pursuant to a provisional authority. Provisional authorities are typically granted for a period of 18 months. The Philippine Revised Administrative Code of 1987 provides that if the grantee of a license or permit, such as a CPCN or provisional authority, has made timely and sufficient application for the extension thereof, the existing CPCN or provisional authority will not expire until the application is finally decided upon by the administrative agency concerned. However, there can be no assurance that our franchises, CPCNs and provisional authorities will be renewed. For a description of our licenses, see Item 4. Information on the Company Licenses and Regulation.
The NTC also regulates the rates we are permitted to charge for services that have not yet been deregulated, such as local exchange services. There can be no assurance that the NTC will not impose additional obligations on us that could lead to the revocation of our licenses if not adhered to and/or reduction in our total revenues or profitability. In addition, the NTC could adopt changes to the regulations governing our interconnection with other telecommunications companies or the rates and terms upon which we provide services to our customers that could have a material and adverse effect on our results of operations.
The PLDT Group is also subject to a number of national and local taxes. On May 24, 2005, the President of the Philippines signed into law Republic Act No. 9337, or R.A. 9337, amending certain sections of the National Internal Revenue Code, which took effect on November 1, 2005. R.A. 9337, among others, introduced the following changes:
• The regular corporate income tax rate for domestic corporations and resident/non-resident foreign corporations increased from 32% to 35% effective November 1, 2005 and will be reduced to 30% effective January 1, 2009.
• The VAT rate increased from 10% to 12% effective February 1, 2006.
• The input VAT on capital goods should be spread evenly over the estimated useful life or sixty months, whichever is shorter, if the acquisition cost, excluding the VAT component thereof, exceeds one million pesos.
There can be no assurance that PLDT Group will not be subject to new and/or additional taxes and that PLDT Group will be able to impose additional charges or fees to compensate for the imposition of such taxes. Furthermore, while the National Internal Revenue Code provides that our regular income tax rate will be reduced to 30% effective January 1, 2009, there can be no assurance whether or when such reduction in the regular corporate income tax rate will be implemented.
There are also various bills pending in the Philippine Congress which propose to impose a franchise tax on telecommunication companies and to tax telecommunications services, among them, the imposition of a tax on mobile phone companies on all text entries to text games; the imposition of a Php0.50 specific tax on each SMS to be borne by the cellular phone companies; and the imposition of a 10% ad valorem tax on all cellular phone calls using 3G. We cannot assure that we would be able to impose additional charges or fees to compensate for the imposition of such taxes.
The NTC may implement proposed changes in existing regulations and introduce new regulations which may result in increased competition and may have negative implications for our revenues and profitability
On June 16, 2000, the NTC issued Memorandum Circular No. 13-6-2000 proposing that cellular operators, including Smart and Piltel, be required, among other things:
• to bill their subscribers for cellular calls on a six-second pulse basis instead of the current per minute basis;
• not to bill calls directed to recorded voice messages; and
• to extend the expiration date of prepaid cards from the current two months to two years.
Along with the other Philippine cellular operators, Smart filed a complaint for the nullification of this memorandum circular before the regional trial court of Quezon City and sought for the issuance of a preliminary injunction while proceedings are ongoing. The regional trial court issued the preliminary injunction, which restrained the implementation of the memorandum circular. The complaint of the Philippine cellular operators is being heard by the regional trial court of Quezon City.
In December 2005, the NTC issued a consultative document on the development of competition policy framework for the information communications sector. The consultative paper contains eleven questions which cover the following key areas:
• a review of market trends deemed to impinge on current and future state of competition in the sector;
• an exploration of major policies that may change the balance of market power, hence the nature and degree of competition;
• an assessment of the quality of current regulation, identifying major handicaps of the NTC; and
• a discussion of the urgent tasks for the NTC to effectively govern a dynamic and complex industry.
The NTC invited public comment from industry stakeholders and other interested parties in relation to the issues raised in the paper. On January 31, 2006, we submitted a comprehensive response to the consultative paper. On August 24, 2006, the NTC issued another consultative document specifically focusing on its proposal to impose asymmetric regulations on carriers with significant market power, or SMP, including a discussion on its proposed roadmap for implementing such SMP obligations. On October 23, 2006, we submitted our response to the second consultative paper to the NTC.
In formulating both our responses, we took into account both industry interests and the broader context of our nations economic development, drawing on the experience in other countries. We believe that the basis for the need for regulatory reform is unclear and the envisioned SMP regime is inappropriate for the Philippines, as the market is highly competitive and well-functioning. In addition, the imposition of SMP and its attendant obligations would discourage capital investments in a sector on which the Philippine economy is highly dependent. We have therefore proposed that the NTC explore its full range of options available on a cost-benefit basis, taking into consideration the specific local context of the Philippine marketplace.
There can be no assurance that the NTC will not impose changes to the current regulatory framework which may lead to increased competition. Any such changes may have an adverse effect on our business, results of operations and prospects.
If we are unable to install and maintain telecommunications facilities and equipment in a timely manner, we may not be able to keep up with our principal competitors, which may have negative implications for our revenue and profitability
Our business requires the regular installation of new, and the maintenance of existing, telecommunications transmission and other facilities and equipment, which are being undertaken. The installation and maintenance of these facilities and equipment are subject to risks and uncertainties relating to:
• shortages of equipment, materials and labor;
• work stoppages and labor disputes;
• interruptions resulting from inclement weather and other natural disasters;
• unforeseen engineering, environmental and geological problems; and
• unanticipated cost increases.
Any of these factors could give rise to delays or cost overruns in the installation of new facilities or equipment or could prevent us from properly maintaining the equipment used in our networks, and could have a material and adverse effect on our results of operations and financial condition.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could adversely impact investor confidence and the market price of our common shares and ADSs
Effective internal controls over financial reporting are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we are unable to provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our reputation and results of operations could be harmed.
are required to comply with various Philippine and U.S. laws and regulations on
internal controls. For example, pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, beginning with the Annual Report on
Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal control over financial reporting, including through a failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed, we could fail to meet our reporting obligations and there could be a material adverse effect on the market prices of our common shares and ADSs.
Risks Relating to the Philippines
PLDTs business may be affected by political or social or economic instability in the Philippines
The Philippines is subject to political, social and economic volatility that, directly or indirectly, may have a material adverse impact on our ability to sustain our business and growth.
For example, on May 10, 2004, the Philippines held a presidential election which resulted in a victory by the incumbent President Gloria Macapagal-Arroyo who successfully retained her post. Shortly after the elections, allegations of irregularities in the presidential elections, such as stolen ballots, vote buying and attempts to improperly influence the vote count, intensified and led to impeachment complaints against President Arroyo, which were subsequently dismissed.
Additionally, the Philippines have experienced various street protests and violent civil unrest, including coup detat attempts against the administration of President Arroyo. For example, recent such events include the storming by armed rebel soldiers on November 29, 2007 of a luxury hotel in Makati City, Philippines, occupying part of the hotel and demanding that President Arroyo step down, and the declaration by President Arroyo of a state of emergency from February 24, 2006 to March 3, 2006.
Furthermore, the Philippine economy has experienced periods of slow growth, high inflation and significant devaluation of the peso. The Philippine government is also facing a fiscal deficit that the government is aiming to eliminate by 2008 by implementing a number of economic reforms.
The fiscal deficit position of the Philippine government and the ongoing political uncertainty have resulted in increased concerns about the political and economic stability of the country. There can be no assurance that the political environment in the Philippines will be stable or that the current or any future government will adopt economic policies conducive to sustained economic growth or which do not impact adversely on the current regulatory environment for telecommunications or other companies.
If foreign exchange controls were to be imposed, our ability to meet our foreign currency payment obligations could be adversely affected
Approval from or registration with the BSP for the issuance and guarantee of foreign currency-denominated borrowings is not required in order to make our foreign currency payment obligations legally valid and binding. However, receiving this approval and registration will enable a borrower to access the banking system to obtain foreign currency to service its debt obligations rather than using other sources of foreign currency, for example, foreign currency revenue streams.
The Philippine government has, in the past, instituted restrictions on the conversion of the peso into foreign currency and the use of foreign exchange received by Philippine companies to pay foreign currency-denominated obligations. The Monetary Board of the BSP has statutory authority, with the approval of the President of the Philippines, during a foreign exchange crisis or in times of national emergency, to:
• suspend temporarily or restrict sales of foreign exchange;
• require licensing of foreign exchange transactions; or
• require the delivery of foreign exchange to the BSP or its designee banks.
There can be no assurance that foreign exchange controls will not be imposed in the future. If imposed, these restrictions could materially and adversely affect our ability to obtain foreign currency to service our foreign currency obligations.
The occurrence of natural catastrophes may materially disrupt our operations
The Philippines has experienced a number of major natural catastrophes over the years including typhoons, volcanic eruptions and earthquakes that may materially disrupt and adversely affect our business operations. The earthquake that hit Taiwan in December 26, 2006 severed cable systems linking the Philippines to other Asian and American countries, causing major slowdown of voice and non-voice data traffic exchange. There can be no assurance that the insurance coverage PLDT maintains for these risks will adequately compensate it for all damages and economic losses resulting from natural catastrophes.
We are the leading national telecommunications service provider in the Philippines. Through our three principal business groups wireless, fixed line, and information and communications technology we offer a wide range of telecommunications services to approximately 32 million subscribers in the Philippines across the nation's most extensive fiber optic backbone and fixed line, cellular and satellite networks.
We are the leading fixed line service provider in the Philippines with approximately 59% of the total reported fixed line subscribers nationwide as at December 31, 2007. Smart, our wholly-owned subsidiary, is the leading cellular service provider in the country, with approximately 37% of total reported cellular subscribers as at December 31, 2007. Piltel, Smarts 92.1%-owned subsidiary, had approximately 18% of total reported cellular subscribers as at December 31, 2007. We have interests in the information and communications technology sectors, including the operation of our VitroTM data center, customer interaction services, formerly referred to as call center business, and knowledge processing solutions business, formerly referred to as business process outsourcing.
Our common shares are listed and traded on the Philippine Stock Exchange, or PSE, and our American Depositary Shares, or ADSs, evidenced by American Depositary Receipts, or ADRs, are listed and traded on the New York Stock Exchange in the United States.
We had a market capitalization of approximately Php547,841 million (US$13,541 million) as at February 29, 2008, representing one of the largest market capitalizations among Philippine-listed companies. For the year ended December 31, 2007, we had total revenues of Php151,862 million (US$3,667 million).
Our principal executive offices are located at the Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines and our telephone number is +(632) 816-8534. Our website address is www.pldt.com.ph. The contents of our website are not a part of this annual report.
PLDT was incorporated under the old Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following the merger of four telephone companies under common U.S. ownership. In 1967, effective control of PLDT was sold by the General Telephone and Electronics Corporation, then a major shareholder since PLDT's incorporation, to a group of Filipino businessmen. In 1981, in furtherance of the then existing policy of the Philippine government to integrate the Philippine telecommunications industry, PLDT purchased substantially all of the assets and liabilities of the Republic Telephone Company, which at that time was the second largest telephone company in the Philippines. In 1998, the First Pacific Group acquired a significant interest in PLDT. On March 24, 2000, NTT Communications, through its wholly-owned subsidiary NTT Communications Capital (U.K.) Limited, or NTTC-UK, became PLDTs strategic partner with approximately 14% economic and voting interest in the issued and outstanding common stock of PLDT. Simultaneous with NTT Communications investment in PLDT, we acquired 100% of Smart. On March 14, 2006, NTT DoCoMo acquired from NTT Communications approximately 7% of PLDTs then outstanding common shares held by NTT Communications with NTT Communications retaining ownership of approximately 7% of PLDTs common shares. Since March 14, 2006, NTT DoCoMo has made additional purchases of shares of PLDTs common stock and together with NTT Communications beneficially owned 20.86% of the outstanding shares of PLDTs common stock as at February 29, 2008. On February 28, 2007, Metro Pacific Asset Holdings, Inc., a Philippine affiliate of First Pacific, completed the acquisition of an additional interest of approximately 46% in PTIC. This additional investment in PTIC, a shareholder of PLDT, represents an attributable interest of approximately 6.4% of the then issued common shares of PLDT and thereby raised the First Pacific Groups beneficial ownership to approximately 28% of PLDTs shares of common stock as at that date. First Pacific Group had beneficial ownership of approximately 26.17% in PLDTs outstanding common stock as at February 29, 2008. See Item 7. Major Shareholders and Related Party Transactions for further discussion.
PLDT's original franchise was granted in 1928 and was last amended in 1991, extending its effectiveness until 2028 and broadening PLDTs franchise to permit PLDT to provide virtually every type of telecommunications service. PLDTs franchise covers the business of providing basic and enhanced telecommunications services in and between the provinces, cities and municipalities in the Philippines and between the Philippines and other countries and territories including mobile, cellular, wired or wireless telecommunications system, fiber optics, multi-channel transmission distribution systems and their value-added services such as but not limited to transmission of voice, data, facsimile, control signals, audio and video, information services bureau and all other telecommunications systems technologies, as are at present available or can be made available through technical advances or innovations in the future. See Item 8. Financial Information Legal Proceedings Quo Warranto Action for information regarding legal proceedings initiated by the Solicitor General with respect to PLDT's franchise.
Our consolidated capital expenditures amounted to Php24,824 million and Php20,674 million in 2007 and 2006, respectively. Of these amounts, Php9,912 million and Php8,902 million were attributable to PLDT in 2007 and 2006, respectively, while Php14,179 million and Php10,506 million were spent by Smart in 2007 and 2006, respectively. The remaining balances were spent by our other subsidiaries, principally ePLDT and its subsidiaries.
PLDT Group includes the following significant subsidiaries as at February 29, 2008:
Level Up!, SPi and CyMed were all acquired in 2006 and their financial results have been included in our consolidated financial statements since February, July and August 2006, respectively. On April 12, 2007, SPi acquired a 100% equity interest in Springfield Service Corporation, or Springfield, a company engaged in the medical billing and revenue cycle management market in the United States. The financial results of Springfield have been included in our 2007 consolidated financial statements since April 2007. See Note 11 Goodwill and Intangible Assets to the accompanying audited consolidated financial statements in Item 18 for further discussion regarding these and other acquisitions.
We provide cellular and wireless broadband, satellite and other services through our wireless business, which contributed about 95% and 5% of our wireless service revenues, respectively, in 2007. The rapid growth in the cellular market has resulted in a change in our revenue composition and sources of our revenue growth. Starting with 2003, cellular service has become our major revenue source surpassing fixed line revenues. Cellular data services, which include all text messaging and text-related services ranging from ordinary text to value-added services, contributed significantly to our revenue increase. Our total wireless revenues accounted for 62% and 60% of our total consolidated revenues for the years ended December 31, 2007 and 2006, respectively. For the years ended December 31, 2007 and 2006, cellular service revenues accounted for 88% and 90%, respectively, of our total wireless revenues
We provide cellular services (including handset sales), through Smart and Piltel. Smart is the leading cellular service provider in the Philippines, with 20,339,204 subscribers as at December 31, 2007, representing a market share of approximately 37%. Piltel, a reseller of Smart's GSM service with its own branding, had 9,701,826 subscribers as at December 31, 2007, representing an estimated market share of 18%. In 2007, the combined number of Smart's and Piltel's subscribers increased by 5,865,646, or 24%, to 30,041,030 primarily due to multiple SIM card ownership, in which subscribers avail of our services in addition to having subscriber arrangements with other wireless operators, and our continued expansion in the lower income segment of the Philippine wireless market, which overall resulted in a decrease in our average revenue per user, or ARPU. As at December 31, 2007, cellular penetration in the Philippines reached over 60%, or over 18 times the country's fixed line penetration, although the existence of subscribers owning multiple SIM cards has likely overstated this penetration rate to a certain extent.
Smart's and Piltel's cellular subscriber gains were predominantly attributable to their respective prepaid services. Approximately 99% of Smarts and all of Piltels cellular subscribers as at December 31, 2007 were prepaid service subscribers. The predominance of prepaid service reflects one of the distinguishing characteristics of the Philippine cellular market. The growth in our prepaid service has enabled us to increase and broaden our subscriber base rapidly while controlling credit risk and reducing billing and administrative costs on a per-subscriber basis.
Our cellular subscriber growth has also been driven by text messaging. Text messaging is extremely popular in the Philippines, particularly on the prepaid platform, as it provides a convenient and inexpensive alternative to voice and e-mail based communications. Text messaging contributed significantly to Smart's cellular data service revenue growth in 2007, generating revenues of Php41,265 million, an increase of Php6,616 million, or 19%, over 2006.
Smart's Nokia-provided cellular network is the most extensive in the Philippines, covering substantially all of Metro Manila and most of the other major population centers in the Philippines. Its dual-band GSM network allows it to efficiently deploy high capacity 1800 MHz base transceiver stations, or BTS, in dense urban areas while its 900 MHz BTS can be much more economically deployed in potentially high growth, but less densely populated provincial areas. We have rolled out a 3G network based on a W-CDMA technology and currently upgrading our wireless broadband facilities. With 7,825 GSM base stations as at the end of December 2007, Smarts cellular network covers approximately 99% of all towns and municipalities in the Philippines, accounting for approximately 99% of the population.
We are the leading provider in the Philippines of fixed line telecommunications services throughout the country. Our fixed line business group offers local exchange, international long distance, national long distance, data and other network and miscellaneous services. We had 1,724,702 fixed line subscribers as at December 31, 2007. Total revenues from our fixed line services accounted for 37% and 41% of our total revenues for the years ended December 31, 2007 and 2006, respectively.
Our 6,400-kilometer long domestic fiber optic network, or DFON, is supported by an extensive digital microwave backbone. Our fixed line network reaches all of the major cities and municipalities in the Philippines, with a concentration in the Metropolitan Manila area. Our network offers the country's most extensive connections to international networks through three international gateway switching exchanges, satellite systems and various regional submarine cable systems in which we have interests. We are currently upgrading our fixed line facilities to NGN as well as expanding our DSL broadband facilities.
Information and Communications Technology
Through our wholly-owned subsidiary, ePLDT, we provide broad-based integrated information and communications technology, or ICT, services focusing on infrastructure and solutions for internet applications, internet protocol-based solutions and multimedia content delivery. ePLDT's principal activities are the operation of an internet data center under the brand name Vitro, customer interaction services, knowledge processing solutions, and internet and online gaming business. Total revenues from our ICT services accounted for 7% and 5% of our total revenues for the years ended December 31, 2007 and 2006, respectively.
We believe our business is characterized by the following competitive strengths:
• Recognized Brands. PLDT and Smart are strong and widely recognized brand names in the Philippines. We have built the PLDT brand name for 80 years as the leading telecommunications provider in the Philippines. Smart is recognized in the Philippines as an innovative provider of high-quality cellular services. Piltel's Talk N Text brand, which is provided using Smarts network, has also gained significant recognition.
• Leading Market Shares. With approximately 32 million fixed line and cellular subscribers as at December 31, 2007, we have the leading market positions in both the fixed line and cellular markets in the Philippines.
• Diversified Revenue Sources. As a result of the continued growth of cellular service in the country, approximately 62% of our total consolidated revenues in 2007 were derived from our wireless business segment. Fixed line revenues, which represented 37% and 41% of our total revenues in 2007 and 2006, respectively, have declined over the past years as pressures on traditional fixed line voice revenues, resulting from decreases in our local exchange, international long distance and national long distance services. We continue to identify and develop new revenue sources from our cellular, fixed line and ICT businesses.
• Advanced Integrated Network. With one of the most advanced and extensive telecommunications networks in the Philippines, we are able to offer a wide array of communications services. We are enhancing the capabilities of our fixed line and wireless networks to allow us to better exploit this competitive strength and achieve higher levels of network efficiency in providing voice and data services. In addition, we continue our roll out of 3G and wireless broadband and our upgrade to NGN in order to increase broadband subscribers, and expand our data/broadband capabilities.
• Innovative Products and Services. We have successfully introduced a number of innovative and award-winning cellular products and services, including Smart Money, Smart Load and Pasa Load. Smart Load is an over-the-air electronic loading facility designed to make reloading of air time credits more convenient for, and accessible to consumers. Pasa Load (the term pasa means transfer in the vernacular), a derivative service of Smart Load that allows load transfers to other Smart Buddy and Talk N Text subscribers.
• Strong Strategic Relationship. We have important strategic relationships with First Pacific, NTT DoCoMo and NTT Communications. The technological support, international experience and management expertise made available to us through these strategic relationships enhance our market leadership and ability to provide and cross-sell a more complete range of products and services.
The key elements of our business strategy are:
• Build on our leading positions in the fixed line and wireless businesses. We plan to build on our position as the leading provider of fixed line service in the Philippines by continuing to launch new products and services to increase subscriber value and utilization of our existing facilities and equipment at reduced cost. We plan to build on our position as the leading wireless service provider in the Philippines by continuing to introduce new products and services to increase our subscribers' use of our network for both voice and data, as well as their reliance on our services. We are currently upgrading our fixed line facilities to NGN, and have rolled out a 3G network based on a W-CDMA technology and are expanding our DSL and wireless broadband facilities. Our operating target is to continue growth in profitability by increasing our revenues while controlling our costs.
• Capitalize on our strength as an integrated provider of telecommunications services. We offer the broadest range of telecommunications services among all operators in the Philippines. We plan to capitalize on this position to maximize revenue opportunities by bundling and cross-selling our products and services, and by developing convergent products that feature the combined benefits of voice and data, fixed line, wireless and ICT services utilizing our network and business platforms. We are also lowering our costs by integrating the operations of our different businesses.
• Strengthen our leading position in the data and broadband market. Leveraging on the inherent strength of our fixed line and wireless businesses, we are committed to further develop, enhance and lead our fastest growing business segment broadband, data and other network services. Consistent with our strategy of introducing innovative products and services using advanced technology, we have launched various products and services that address different market needs.
• Maintain a strong financial position and improve shareholder returns. In recent years, we have significantly improved our financial position by utilizing our cash flows principally for debt reduction. As the cash flows generated by our businesses have increased and our leverage ratios have improved, we were able to restore the payment of cash dividends to our common shareholders beginning 2005. Our debt decreased to US$1.6 billion as at December 31, 2007 and we paid dividends on common shares aggregating Php28,167 million in 2007. As a result of our strong cash flows and reduced debt levels, we have increased our regular cash dividend payout ratio to 70% of our 2007 earnings per share from 60% in 2006 and 40% in 2005. Further to our regular cash dividend payments and after having determined that we have capacity to pay additional returns to shareholders, we paid special cash dividends which effectively increased our dividend pay-out ratio to close to 100% of our 2007 earnings per share and 85% of our 2006 earnings per share. We expect that a greater proportion of our free cash flows in succeeding years will be utilized for the payment of cash dividends to common shareholders and investments in new growth areas while continuing to maintain a healthy balance sheet position. As part of our growth strategy, we made and may continue to make acquisitions and investments in companies or businesses. We will continue to consider value-accretive investments in related businesses such as those in the global outsourcing and off-shoring industry.
We provide cellular, wireless broadband, satellite and other services through our wireless business segment.
Our cellular business, which we provide through Smart and Piltel to over 30 million subscribers, approximately 99% of whom are prepaid subscribers, is focused on providing wireless voice communications, wireless data communications (primarily through text messaging) and a variety of other value-added services, which includes (a) Mobile Banking (banking services delivered over the cellular network); (b) specialized content such as ringtones, logos, caller ringback tunes; (c) Smart Money; (d) international roaming; and (e) games and other VAS developed on Smarts platform. Smart services approximately ten million subscribers of Piltel on its GSM network through a facilities service agreement with Piltel, under the brand name Talk N Text.
The following table summarizes key measures of Smarts and Piltels cellular business as at and for the years ended December 31, 2007, 2006 and 2005:
(1) Represents Talk N Text, a prepaid service provided by Piltel using Smarts network. Piltels revenue is net of service fees payable to Smart for using Smarts network. Piltel does not offer postpaid service.
(2) Pursuant to the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have omitted revenue data for 2005. Please see Presentation of Financial Information above for further details.
Service Plans. Smart markets nationwide cellular communications services under the brand names Smart Buddy, Smart Gold and Smart Infinity. Smart Buddy is a prepaid service while Smart Gold and Smart Infinity are postpaid services, which are all provided through Smarts digital network. Piltel markets its cellular prepaid service under the brand name Talk N Text, which is also provided through Smarts network.
Since 2006, Smart and Piltel have focused on segmenting the market by offering sector-specific, value-driven packages for its prepaid subscribers. These include new varieties of our top-up service which provide a fixed number of messages with prescribed validity periods and call packages which allow a fixed number of calls of preset duration. Starting out as purely on-network packages, Smarts and Piltels top-up services now offer text message bundles available to all networks. Smart also continues to offer Smart 258, a registration-based service which offers unlimited on-network text messaging in various load denominations with designated expiration periods.
Smart also has a roster of 3G services which it commercially launched in May 2006. These services include video calling, video streaming, high-speed internet browsing and downloading of special 3G content, offered at rates similar to those of 2G services.
Voice Services. Cellular voice services comprise all voice traffic as well as voice value-added services such as voice mail and international roaming. Voice services remains a significant contributor to wireless revenues, generating a total of Php36,105 million, or 44%, and Php35,221 million, or 47%, of cellular service revenues in 2007 and 2006, respectively. Local calls continue to dominate outbound traffic with 67% of all outbound minutes originating from our cellular service. In 2007, traffic volumes from local calls totaled 3,728 million minutes compared to 3,362 million minutes in 2006. National long distance traffic volumes for 2007 totaled 70 million minutes compared to 73 million minutes in 2006. Outbound international long distance remained at 2% of total outbound traffic with 201 million minutes and 165 million minutes generated in 2007 and 2006, respectively. The ratio of inbound-to-outbound international long distance minutes was 11.7:1 for 2007, compared to 12.5:1 in 2006.
Data Services. Cellular revenues from data services include all text messaging-related services and other data value-added services. The Philippines cellular market is one of the most text messaging-intensive markets in the world, totaling more than a billion text messages per day. Text messaging is extremely popular in the Philippines, particularly on the prepaid platform, as it provides a convenient and inexpensive alternative to voice and e-mail based communications. Text messaging also utilizes less network capacity than voice, thereby increasing network efficiency.
Text messaging has been one of the key drivers for our cellular subscriber growth. Strong volume growth in text messaging contributed significantly to Smart's cellular revenue growth in 2007, generating revenues of Php41,265 million, an increase of Php6,616 million, or 19%, over 2006. In 2007, Smart and Piltel's text messaging systems handled over 25,289 million outbound messages on standard SMS services with another 187,420 million messages generated by the bucket-priced text services. This compares to 32,065 million outbound messages on standard SMS services in 2006 and 203,669 million outbound messages generated through bucket-priced text service. Unlimited SMS services were only made available in March 2005.
We launch from time to time various promotions to stimulate usage and subscriber growth. For example, in 2005, Smart launched a series of promotions to test the market demand for fixed rate or bucket plans for voice and text. In 2006, Smart introduced low-denomination text packages which were further refined in 2007 as Smart focused on further segmenting its market by offering sector-specific, value-driven packages. As a result, Smart continued to successfully defend its market leadership through innovative voice and text packages that drive activations, boost usage and strengthen brand equity.
The success of text messaging is a strong indicator of future data usage potential in this market. In 2007, approximately 54% of Smarts cellular revenues were derived from data usage, compared to 51% in 2006.
Smart also offers the following value-added cellular services:
• Mobile Banking, launched in collaboration with various banks, allows subscribers to execute banking transactions such as balance inquiries and transfers over their mobile telephones;
• Smart Money, launched in conjunction with MasterCard, enables subscribers to pay for their purchases by transferring money from their bank accounts to their Smart Money cards as well as reload their prepaid cards electronically; and
• Smart Padala, one of the many innovative initiatives from our Smart Money platform, is the first cash remittance service through text and is faster and cheaper than traditional remittance arrangements. It was launched initially as an international remittance service for overseas Filipino workers but is now available for domestic remittances as well.
Consistent with Smarts objective to develop new businesses, Smart introduced in 2006 a fixed wireless broadband service under the brand SmartBro to complement PLDTs DSL in areas that are currently not covered by the fixed line network. SmartBro is rapidly increasing network coverage in order to retain first mover advantage in areas with limited or no fixed line or broadband coverage. SmartBro is also pioneering a shared access model in order to propagate broadband and address affordability barriers.
Due to the high level of text messaging service usage, we believe that the Philippine market is well suited for text-based informational and e-commerce services. Our current approach is to continue maximizing our GSM, or 2G, services while upgrading our network to 3G evolution technology. On December 29, 2005, Smart was awarded a 3G license by the NTC after being ranked highest by the NTC in garnering a perfect score on a 30-point grading system designed to gauge the capability of telecommunication operators to effectively provide extensive 3G services. As a result of the perfect ranking, Smart received the largest radio frequency allocation of 15 MHz as well as first choice of frequency spectrum. Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrum, the range that would best enable it to rapidly deploy its 3G network nationwide and at the same time offer the highest quality of 3G service.
Our current policy is to recognize a prepaid subscriber as active only when the subscriber activates and uses the SIM card and reloads it at least once during the month of initial activation or in the immediately succeeding month. A prepaid cellular subscriber is disconnected if the subscriber does not reload within four months after the full usage or expiry of the last reload.
Smart Buddy and Talk N Text Call and Text prepaid cards are sold in denominations of Php300, Php500 and Php1,000, which include 33, 83 and 250 free text messages, respectively. We also recently introduced a Php100 denomination that contains Php100 worth of air time with a validity period of 10 days. While the stored value of a prepaid card remains valid for a period from the time a subscriber activates the card, as we launch from time to time promotions with shorter validity periods. The introduction of our over-the-air electronic loading facility Smart Load in 2003 made reloading of air time credits more convenient and accessible for consumers. Smart Loads over-the-air reloads have evolved to respond to market needs and now come in denominations of Php15, Php30, Php50, Php60, Php115, Php200, Php300 and Php500 with corresponding expiration periods.
Smart Load was followed by Pasa Load, a derivative service, allowing prepaid subscribers to transfer even smaller denominations to other prepaid subscribers. Our prepaid subscribers are charged between Php5.50 per minute and Php6.50 per minute for calls within our wireless network and calls terminating to other cellular or fixed line networks. Voice tariffs on our various prepaid voice packages range from a low of Php5.50 for four 15-second on-network calls to Php20 for three 3-minute on-network calls, valid for one day.
We offer both flat rate, or regular, and consumable postpaid plans with monthly service fees ranging from Php500 to Php3,500. These plans are available with varying amounts of free air time and text messages and different rates beyond the free minutes and text messages, depending on the monthly service fee. Monthly service fees for flat rate, or regular, plans are applicable only to local calls and text messages and for consumable plans to all voice calls, text messages (both local and international) and value-added services.
Smart is permitted to adjust its cellular air time and national direct dial rates according to changes in the peso-to-U.S. dollar exchange rate. Under the authorization granted to Smart by the NTC, Smart is permitted to increase and is required to decrease its air time and national direct dial rates by 1% for every Php0.25 change in the exchange rate relative to a base rate of Php24.726 to US$1.00. However, Smart has not implemented any foreign currency adjustments to its rates since November 4, 1998 because of the concern that increased rates may result in decreased usage or switching to other cellular providers by its subscribers.
All Smart subscribers pay an international direct dialing rate of US$0.40 per minute. This rate applies to 201 destinations, including the United States, Hong Kong, Japan, Singapore, the United Kingdom and the United Arab Emirates. Smart charges US$0.98 per minute for 27 other destinations and US$2.18 per minute for another ten destinations.
Smart also has in place various promotions to stimulate international usage. In June 2006, Smart IDD Libre Text Abroad was launched wherein subscribers earned one free international text message for every minute of IDD calling. In October 2006, this was replaced by International Budget Text packages. These packages, which have limited duration and varying number of included messages, enable subscribers to send international text to pre-registered recipients of the subscribers choice on supported overseas carriers.
We sell our cellular services primarily through a network of independent dealers and distributors that generally have their own retail networks, direct sales forces and sub-dealers. We currently have nine major dealers, two of which are exclusive. These dealers include major distributors of cellular handsets whose main focus are telecommunications outlets. Account managers from our sales force manage the distribution network and regularly update these business partners on upcoming marketing strategies, promotional campaigns and new products introductions. With the introduction of Smart Load in May 2003, Smart moved into a new realm of distribution. These over-the-air reloads, which were based on the sachet marketing concept of consumer goods such as shampoo and ketchup, required a distribution network that approximates those of fast-moving consumer goods companies. Starting with just 50,000 outlets when it was launched, Smart Loads distribution network now encompasses approximately one million retail agents, 80% of which are micro businesses (e.g., neighborhood stores, individual entrepreneurs, individual roving agents). These micro-retailers must be affiliated with any of Smarts authorized dealers, distributors, sub-dealers or agents. With the prepaid reloading distribution network now extended to corner store and individual retailer levels and minimum reloading denominations as low as Php10, Smarts prepaid service becomes even more affordable and accessible to subscribers.
For prepaid services, we grant discounts to dealers for prepaid phone kits, air time cards and over-the-air reloads sold. Smart and Piltel compensate dealers with Php800 in cash per prepaid phone kit sold. An additional 1% discount based on the suggested retail price is given on cash purchases. Air time cards and over-the-air reloads are sold to distributors at volume discounts determined by the value of the cards purchased by the distributors. Discounts given for air time cards sold range from 8% to 8.4% while discounts on over-the-air reloads range from 2.5% to 5%. Air time cards cannot be returned or refunded and normally expire within six to 12 months after release from the Smart warehouse.
Wireless Broadband, Satellite and Other Services
We currently provide wireless broadband, satellite and other services through SBI, our wireless broadband provider, Wolfpac, our wireless content operator, Mabuhay Satellite and ACeS Philippines.
Through SBI, we are engaged in providing wireless broadband and data services to residential consumers as well as small and medium-scale enterprises in the Philippines. As at December 31, 2007, SBI had 301,738 wireless broadband subscribers under the brand name Smart Bro. Smart Bro aims to strengthen Smarts position in the wireless data segment and complements PLDTs myDSL service in areas where the latter is not available.
Through Wolfpac, we are engaged in the business of consumer mobile applications software development and consumer mobile content development and other allied services.
We also offer PLDT WeRoam, or WeRoam, a wireless prepaid or postpaid broadband service, running on the PLDT Groups nationwide wireless network (using GPRS, EDGE, WiFi and 3G/HSDPA technologies).
Mabuhay Satellite is engaged in the control and operation of the Agila II satellite. Commencing commercial operations in January 1998, Agila II is the Philippines' first communication satellite. Mabuhay Satellite leases satellite space segments in both the C and Ku bands on Agila II. Through Agila II, Mabuhay Satellite also offers internet backbone access, video and data broadcasting, and bandwidth-on-demand, facilitating communication links between telecommunications, broadcast and other public utility companies operating in the Asia-Pacific region. In 2007, Mabuhay Satellite generated revenues of Php976 million and posted a net income of Php121 million.
ACeS Philippines currently owns approximately 36.99% of AIL. In 2007, ACeS Philippines generated revenues of Php453 million and posted a net income of Php358 million. AIL aims to develop and implement a satellite-based communications system to provide services to users in the Asia-Pacific region through the Garuda I satellite, or ACeS System and ACeS Service. AIL has entered into interconnection agreements and roaming service agreements with PLDT and other major telecommunications operators that will allow ACeS service subscribers to access GSM terrestrial cellular systems in addition to the ACeS system. Further, AIL has an amended Air Time Purchase Agreement, or ATPA, with National Service Providers in Asia, including PLDT. For further discussion regarding the ATPA, please see Note 22 Related Party Transactions to the accompanying audited consolidated financial statements in Item 18.
As part of the consolidation process of the PLDT Groups wireless business, ACeS Philippines operations is being managed by Smart. This operational arrangement effectively gives Smart the widest service coverage in the Philippines through the combination of the coverage of ACeS Philippines with Smarts cellular service.
Our revenues from wireless broadband, satellite and other services consist of wireless broadband service revenues for SBI, rental payments received for the lease of Mabuhay Satellites transponders charges for ACeS Philippines satellite information and messaging services, service revenues generated from PLDT Globals subsidiaries, and revenues generated from Wolfpac for wireless data content.
SBI offers its wireless broadband and data services for residential consumers as well as small and medium-scale enterprises. The wireless broadband service for residential consumers is branded as Smart Bro and offers a maximum speed of 384 kbps for Php999 per month. Monthly service fees for corporate data services range from Php999 to Php180,000 depending on the connection speed requirements. The monthly service fee for users of the Smart Bro Plug-It, a new service introduced in November 2007, is Php799 and includes 40 hours per month of free internet usage. Users also incur a one-time charge for the Smart Bro Plug-It modem of Php1,200.
Wolfpac generates revenues from SMS subscriptions, institutional services and downloadable contents. The subscription price for the SMS subscription and institutional services is pegged at Php2.50 per SMS, while downloadable contents range from Php10.00 to Php30.00.
WeRoam postpaid offers several packages for its wireless broadband service that include unlimited internet access with speeds ranging from 40 kbps to 1.8 Mbps with monthly recurring fees of Php1,000 to Php1,700 depending on the type of plan selected.
WeRoam prepaid offers several packages that include the GPRS/EDGE card and an air time value for three, six and 12 months with monthly subscription fees based on an initial air time value ranging from Php10,860 to Php20,940. Once the initial air time value expires, continued use of the service requires WeLoad or reloading of additional air time value with different denominations and expiration periods.
Mabuhay Satellite leases its transponders to third parties at average annual rates of approximately US$0.9 million and approximately US$0.7 million for its C-band and Ku-band transponders, respectively. ACeS service mobile subscribers are charged Php13.84 per minute for local and cell-to-cell calls and for national direct dial services, while residential subscribers are charged peak-hour rates of Php13.00 per minute and off-peak hour rates of Php8.00 per minute for domestic calls regardless of destination. For ACeS system public calling offices, callers are charged Php4.50 and Php7.00 per minute for calls terminating to fixed line and cellular networks, respectively. Rates for international long distance calls depend on the country of termination and range from US$0.35 per minute for frequently called countries to US$0.85 per minute for less frequently called countries.
We provide local exchange, international long distance, national long distance, data and other network and miscellaneous services under our fixed line business segment.
We offer postpaid and prepaid fixed line services. Initially intended as an affordable alternative telephone service for consumers under difficult economic conditions, our prepaid fixed line services now form an important part of our overall churn and credit risk exposure management strategy. PLDT has consolidated its prepaid fixed line service into TelePwede, which is funded by e-loads (available at Smart or PLDT e-load retailers). In March 2007, PLDT launched PLDT Landline Plus, a postpaid and prepaid fixed wireless service where subscribers to the service benefit from a text-capable home phone. This service is primarily intended for subscribers in areas where PLDT has no facilities and is expected to increase our fixed line subscriber base.
Local Exchange Service
Our local exchange service, which consists of our basic voice telephony business, is provided primarily through PLDT. We also provide local exchange services through our subsidiaries ClarkTel, SubicTel, Maratel and Piltel. Together, these subsidiaries account for approximately 3% of our consolidated fixed line subscribers.
The following table summarizes key measures of our local exchange service segment as at and for the years ended December 31, 2007, 2006 and 2005:
(1) Previously set forth as number of fixed lines in service, this was restated in 2006 to reflect the effect of the change in parameters used to align with the PLDT Groups policy on subscriber count with the planned use of an integrated billing system for our subscribers.
(2) Pursuant to the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have omitted revenue data for 2005. Please see Presentation of Financial Information above for further details.
As at December 31, 2007, basic monthly charges for our local exchange service in the Metropolitan Manila area were Php592.63 for a single-party residential line and Php1,234.02 for a single business line. Monthly charges vary according to the type of customer (business or residential) and location, with charges for urban customers generally being higher than those for rural/provincial customers. Regular installation charges amount to Php1,200 for residential customers and Php1,500 for business customers. New products launched on promotion or products bundled on existing services usually waive the installation fee or allow for a minimal installation fee of Php500. Aside from the basic monthly charges, we charge our postpaid subscribers separately for NDD, IDD and calls to mobile phones. Calls to PLDT and other landlines within a local area code are free.
Our prepaid fixed line customers generally do not pay a basic monthly charge and are charged based on usage. Subscribers of TelePwede, our upgraded prepaid fixed line service, are charged a monthly fee of Php115 per month to receive incoming calls and are charged per usage for outgoing calls. The TelePwede installation fee is Php1,500, including Php127 of preloaded value. The international and national long distance rates we charge to our prepaid fixed line customers are similar to the rates we charge to our postpaid customers. (For a detailed description of these rates, see International Long Distance Service Rates and National Long Distance Service Rates.)
The monthly service fee for our PLDT Landline Plus service is available in load denominations of Php300, Php600 and Php1,000 for residential and business subscribers and includes 150, 600 and 1,000 free local minutes, respectively.
Pursuant to a currency exchange rate adjustment, or CERA, mechanism authorized by the NTC, we are required to adjust our postpaid monthly local service rates upward or downward by 1% for every Php0.10 change in the peso-to-dollar exchange rate relative to a base rate of Php11.00 to US$1.00. In 2007, we implemented five downward adjustments and one upward adjustment in our monthly local service rates, while there were eight downward adjustments and three upward adjustments in 2006. The average Philippine peso to U.S. dollar rate factored in our monthly local service rates in 2007 was Php48.67 to US$1.00, compared to an average of Php51.53 to US$1.00 in 2006. This change in the average peso-to-dollar rate translated to a peso appreciation of 6%, which resulted in a net decrease of approximately 5% in our average monthly local service rates in 2007. In its letter dated July 16, 2007, the NTC has approved our request to use annual average exchange rates as our basis in CERA computation instead of the currently used monthly averages.
In the first quarter of 2005, House Bill No. 926 was filed and is now pending in the House of Representatives of the Philippines. The proposed bill provides for the cancellation of the currency exchange rate mechanism currently in place. If this bill is passed into law or if the NTC issues guidelines to change the basis of the currency exchange rate mechanism, our ability to generate U.S. dollar linked revenues from our local exchange business could be adversely affected.
International Long Distance Service
Our international long distance service consists of switched voice and packet-based voice and data services that go through our international gateway facilities. We also generate international long distance revenues through access charges paid to us by other Philippine telecommunications carriers for incoming international voice calls that terminate to our local exchange network. Our packet-based voice and data services are transmitted over our existing traditional circuits, VoIP systems and the network of a consortium of dominant carriers in Asia in which PLDT is a member.
The following table shows certain information about our international long distance business as at and for the years ended December 31, 2007, 2006 and 2005:
(1) Pursuant to the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have omitted revenue data for 2005. Please see Presentation of Financial Information above for further details.
International long distance service historically has been a major source of our revenue. However, primarily due to the steep decline in inbound termination and collection rates and intense competition, revenues derived from our international long distance service have been declining.
We have been pursuing a number of initiatives to strengthen our international long distance service business, including by: (i) lowering our inbound termination rates, (ii) identifying and containing unauthorized traffic termination on our network, (iii) being more selective in accepting incoming traffic from second- and third-tier international carriers, and (iv) introducing a number of marketing initiatives, including substantial cuts in international direct dialing rates, innovative pricing packages for large accounts and loyalty programs for some customers. In addition, through PLDT Global, we aggregate inbound call traffic to the Philippines at our points of presence and, using our capacity in submarine cable systems connected to each point of presence, transmit calls to our network. PLDT Global is also enhancing the presence of PLDT in other international markets by offering new products and services such as international prepaid cards, mobile services, SMS transit and other global bandwidth services. We believe these strategies will help us maximize the use of our existing international facilities, and develop alternative sources of revenue.
The table below sets forth the net settlement amounts for international calls handled by PLDT, by country, for the years ended December 31, 2007 and 2006(1):
(1) Pursuant to the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have omitted net settlement amounts for 2005. Please see Presentation of Financial Information above for further details.
Since February 1, 2003, a substantial portion of PLDTs international inbound traffic terminating on its fixed line network is charged approximately US$0.12 per minute.
Rates for outbound international long distance calls are based on type of service, whether operator-assisted or direct-dialed. Our rates are quoted in U.S. dollars and are billed in pesos. The peso amounts are determined at the time of billing. We charge a flat rate of US$0.40 per minute to retail customers for direct-dialed calls, applicable to all call destinations at any time on any day of the week.
We also offer international long distance service through PLDT Budget Card, a prepaid call card, which offers low-priced international calling services at IDD call rates ranging from Php3.00 per minute to Php8.00 per minute depending on the destination to more than 90 destinations (excluding the Middle East). In April 2007, we introduced the Budget Card Middle East Edition which offers reduced IDD call rates of Php10 per minute and Php15 per minute to different destinations in the Middle East. Budget Card and Budget Card Middle East Edition are sold in denominations of Php200, Php100 and Php30 and must be consumed within 30 days from first use.
National Long Distance Service
Our national long distance services are provided primarily through PLDT. This service consists of voice services for calls made by our fixed line customers outside of their local service areas within the Philippines and access charges paid to us by other telecommunications carriers for wireless and fixed line calls carried through our backbone network and/or terminating to our fixed line customers.
The following table shows our national long distance service revenues for the years ended December 31, 2007 and 2006 and our national long distance call volumes for the years ended December 31, 2007, 2006 and 2005:
(1) Pursuant to the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have omitted revenue data for 2005. Please see Presentation of Financial Information above for further details.
Cellular substitution and the widespread availability and growing popularity of alternative, more economical non-voice means of communications, particularly e-mailing and cellular text messaging, have negatively affected our national long distance call volumes. The integration of some of our local exchanges into a single local calling area, as approved by the NTC, has also negatively affected our national long distance call volumes, and consequently, our revenues. Because of this integration, calls between two exchanges located within the same province are no longer considered national long distance calls but are treated as local calls.
Rates for national long distance calls traditionally were based on type of service, such as whether the call is operator-assisted or direct-dialed. However, in line with its move towards rate simplification, PLDT simplified these rates in recent years to a flat rate of Php5.09 per minute for calls originating and terminating to PLDT fixed line network, and for calls terminating to fixed line networks of other local exchange carriers. Additionally, in recent years, PLDT simplified its rates for calls terminating to cellular subscribers to a uniform rate of Php14.00 per minute.
In addition, PLDT launches from time to time promotions to stimulate fixed line usage.
On January 7, 2006, we implemented a monthly flat service rate of Php50 which permits subscribers to make national long distance calls of unlimited duration for Php10 per call to subscribers of PLDT and, which permits subscribers who registered for this flat rate service on or before February 24, 2006, to also make such calls to subscribers of Smart and Piltel.
We continue to evaluate the present rate structure of our national long distance services from per minute toll charges to flat rates per call for calls of unlimited duration. This is envisioned to make fixed line rates more competitive with VoIP rates and to revitalize interest in fixed line usage. We continue studying various pricing models in respect of the above new rate plan.
PLDT currently has interconnection arrangements with the majority of other local exchange carriers, pursuant to which the originating carrier pays: (1) a hauling charge of Php0.50 per minute for short-haul traffic or Php1.25 per minute for long-haul traffic to the carrier owning the backbone network; and (2) an access charge of Php1.00 per minute to the terminating carrier. PLDT still maintains revenue-sharing arrangements with a few other local exchange carriers, whereby charges are generally apportioned 30% for the originating entity, 40% for the backbone owner and the remaining 30% for the terminating entity. For more information on these interconnection arrangements, see Interconnection Agreements.
Data and Other Network Services
Our data and other network service revenues include charges for leased lines, IP-based, packet-based and switched-based services. These services are used for domestic and international communications such as private networking, broadband and narrowband internet-based data communications, and packet-based communication.
The following table shows our data and other network service revenues for the years ended December 31, 2007 and 2006 and our numbers of broadband and narrowband subscribers as at December 31, 2007, 2006 and 2005:
(1) Pursuant to the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have omitted revenue data for 2005. Please see Presentation of Financial Information above for further details.
Recognizing the growth potential of data and other networking services, including IP-based services, and in light of their importance to our business strategy, we have been putting considerable emphasis on these service segments. These segments registered the highest percentage growth in revenues among our fixed line services in 2007 and continued to grow in the first quarter of 2008.
The continuous upgrading of our network using next-generation facilities and the completion of our domestic fiber optic backbone has enabled us to offer a growing range of value-added and broadband services. With this and other technological upgrades, our infrastructure has developed from a traditional voice facility to a new packet-switched and IP-based network allowing faster transmission of voice, video and data.
Our IP-based services include PLDT DSL (myDSL and BizDSL), a broadband internet service targeted for heavy individual internet users as well as for small and medium enterprises, PLDT Vibe, a dial-up/narrowband internet service targeted for light to medium residential individual internet users, and I-Gate, our dedicated leased line internet access service targeted for enterprises and value-added service providers.
In addition, in 2006, we introduced Shops.work Unplugged, or SWUP, a bundled service using Smarts GPRS/EDGE network and PLDTs virtual private network, or VPN, for retailers and banks that offers real-time wireless data communication for retailers cashiering point-of sale networks, bank automated teller machines, or ATMs, and merchants swipe card terminals.
In 2007, we continued to broaden our service offerings with the launch of new services and expansion or enhancement of some of the existing offerings.
We conduct our information and communications technology, or ICT, businesses through our wholly-owned subsidiary ePLDT. ePLDT is a broad-based integrated information and communications technology company, focusing on infrastructure and solutions for internet applications, internet protocol-, or IP-, based solutions and multimedia content delivery. ePLDT's principal businesses are the operation of (1) knowledge processing solutions, through the SPi Group, (2) customer interaction services through Vocativ, Parlance and Ventus, (3) an internet data center under the brand name Vitro, and (4) internet and online gaming through Infocom, netGames, Digital Paradise, Digital Paradise Thailand, Level Up! and Airborne Access. Our ICT business segment registered revenues of Php10,799 million and Php6,925 million, accounting for 7% and 5% of our total revenues for 2007 and 2006, respectively. The increase in the revenue contribution from our information and communication technology segment was primarily due to the consolidation of SPi, CyMed and Level Up! since their acquisition by ePLDT on July 11, 2006, August 11, 2006 and April 30, 2006, respectively, and has increased with the full-year consolidation of the SPi Group in 2007.
Knowledge Processing Solutions
ePLDT provides knowledge processing solutions through SPi Group, the second largest pure-play knowledge processing solutions company and the ninth largest independent knowledge processing solutions service provider worldwide acquired by ePLDT in July 2006. SPi has operations in 19 locations in North America, Europe and Asia. On August 11, 2006, SPi acquired 100% of CyMed, a leading medical transcription company based in Richmond, Virginia, and on April 12, 2007, SPi acquired 100% of Springfield, one of the ten largest players in the medical billing and revenue cycle management market.
Customer Interaction Services
ePLDT has established one umbrella brand name, ePLDT Ventus, for all of its customer interaction service businesses, including Vocativ and Parlance. Ventus provides offshore, cost-effective contact center outsourcing solutions specializing in inbound customer care. Vocativ provides customer and technical support to its clients in the Philippines, U.S. and U.K., while Parlance provides the exclusive customer support and billing requirements to one of the largest direct-to-home satellite television providers in the U.S. In total, we owned and operated approximately 6,400 seats with 5,930 customer service representatives, or CSRs, in 2007 compared to approximately 5,600 seats with 5,130 CSRs in 2006. In 2006, ePLDT Ventus launched two new sites bringing our total customer interaction services site count to nine in 2007.
Internet and Online Gaming
ePLDTs internet and online gaming business is conducted through several subsidiaries. ePLDT owns a 99.6% interest in Infocom, one of the country's leading internet service providers, or ISPs. Infocom offers consumer prepaid internet access under the name WarpSpeed and Speed Tipid and postpaid internet access; dedicated dial-up and multi-user dial-up corporate leased lines; broadband internet access through DSL and cable; and website consulting, development and hosting. ePLDT also owns a 75% interest in Digital Paradise, an internet café business with over 174 branches which assumed the assets of Netopia Computer Technologies, Inc. and the brand Netopia. ePLDT further holds an 80%-interest in netGames, a publisher of Massively Multi-player Online Games in the Philippines, and is the Philippine licensee of Khan Online, the countrys first full 3D online game; a 51% interest in Airborne Access, the countrys leading operator of WiFi hotspots, which provides wireless internet access in hotspots equipped with Airborne Access WiFi access points and a 60% equity interest in Level Up!, a leading publisher of online games in the Philippines with about an 80% share of the online gaming market.
ePLDT operates Vitro, one of the Philippines' first internet data centers. Vitro is a CISCO-certified co-location service provider. Vitro provides co-location, web and server hosting, hardware and software maintenance services, website development and maintenance services, webcasting and webhosting, shared applications, data disaster recovery and business continuity services, intrusion detection and internet protocol security services, as well as firewall and managed firewall services.
Wireless Network Infrastructure
Through Smart, we operate a digital GSM network. To meet the growing demand for cellular services, Smart has implemented an extensive deployment program for its GSM network covering substantially all of Metro Manila and most of the other population centers in the Philippines. As at December 31, 2007, Smart had 43 mobile switching centers and 77 text messaging service centers and 7,825 base stations in operation after having added 1,726 base stations to its nationwide cellular network in 2007, Piltel had six active cell sites.
Smart has an operating spectrum of 7.5 MHz in the 900 band supporting both its GSM and previously its ETACS network and 20 MHz in the 1800 band for GSM and 15 MHz in the 3G band for W-CDMA. Its dual-band GSM network allows it to efficiently deploy high capacity 1800 MHz base transceiver stations in dense urban areas while its 900 MHz base transceiver stations can be much more economically deployed in potentially high growth, but less densely populated provincial areas. The 3G network revolutionizes mobile technology by providing more capacity, faster data rates and richer data and video applications. Its initial deployment is seen as feasible in urban areas where there is a demand for mobile broadband applications and where 3G mobile units are more likely to be available. Spectrum constraints will not affect the Smarts expansion plans for GSM in the foreseeable future.
Due to its access to PLDTs network assets, Smart has been able to achieve significant capital expenditure savings, which capital expenditures are understood to be significantly less, on a per net addition basis, than its current competitors. This translates into an improved ability to price competitively and target the mass market subscriber base in the Philippines, while retaining profitability. Based on existing equipment purchase contracts, Smart expects incremental capital expenditure per net additional subscriber to amount to less than US$50.
We expect continued increases in coverage (particularly indoor) in the coming years, as well as the introduction of new types of BTS for indoor and commercial offices. Smart has introduced the NanoBTS, a compact and easy-to-deploy solution for indoor coverage and increased efficiencies in underserved offices and buildings. The new base station equipment uses IP for transport and Smart is one of the very first operators to deploy this access solution.
Smart was awarded a 3G license by the NTC in 2005 and received the largest radio frequency allocation of 15 MHz. Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrum, the range that would best enable it to rapidly deploy its 3G network nationwide and at the same time offer the highest quality of 3G service. Smart has commenced its 3G network roll-out and continues to extend the reach of its 3G network in various cities and municipalities nationwide, further improving coverage in major urban centers and selected provincial areas.
Smart and Piltel have been co-locating their cell sites where their base stations are installed. As at December 31, 2007, 26 of Smart's mobile switching centers and 214 of Smart's cell sites were housed in PLDTs fixed line complexes while 249 of Smarts cell sites were co-located with Piltel. These operational synergies have allowed Smart to reduce switch installation time from three months to five weeks.
Wireless Broadband, Satellite and Other Services
SBI operates a nationwide broadband wireless internet data services. It is operating in the 2.4, 3.5 and 5.7 GHz spectrum, supporting its WiFi, Canopy and eventually WiMax services, respectively. It offers fixed wireless broadband internet connectivity to both residential and corporate clients. It also maintains and operates WiFi hotspots installations that serve mobile internet users. Almost 1,798 of Smarts base stations are now wireless broadband-capable, covering most of the key cities and the other populated centers in the country. These are strategically co-located in the Smarts cellular base stations that allow it to reach as many subscribers as possible, in the fastest possible way. For its backbone, it uses the nationwide PLDT and Smart fiber optic and IP backbone that provide substantial bandwidth capacity to utilize and to grow on demand.
Mabuhay Satellite controls and operates the Agila II satellite, which has 30 C-band transponders and 24 Ku-band transponders covering the Asia-Pacific region, the Indian subcontinent and Hawaii. Of the 54 transponders, six have restricted usage due to satellite interference. Through Agila II, Mabuhay Satellite offers internet service, video and data broadcasting, and bandwidth-on-demand, facilitating communication links between telecommunications, broadcast and other public utility companies operating in the Asia-Pacific region. In December 2000, Agila II joined the U.S. FCC's "Permitted Space Station" list, which permits U.S.-owned and operated earth stations in Hawaii to access Agila II for transpacific telecommunications, data, video and internet-over-satellite traffic and vice versa.
ACeS Philippines manages, controls and operates its own satellite gateway and other ground infrastructure, including a 13-meter feeder-link C-band earth station, beam congruency antenna and equipment that serve as the primary interface between the ACeS system and other telecommunications networks. It uses the Garuda I satellite to transmit digital voice services to ACeS Philippines mobile and fixed terminal users within the Asian service area.
Our domestic telephone network includes installed telephones and other equipment on customers premises, local access lines connecting customers to exchanges, referred to as outside plant, inter-office lines connecting exchanges, and long distance transmission equipment. As at December 31, 2007, we had 228 central office exchanges compared to 184 in 2006.
We have our own 6,400-kilometer DFON, the country's first telecommunications network using fiber optics in delivering voice, video, data, and other broadband and multimedia services nationwide. Our fiber optic network employs synchronous digital hierarchy technology to improve network performance and reduce operating costs. Our network is composed of in-land and submarine cable installations and is configured in seven self-healing rings allowing route delivery even in the event of single link failure per ring. To date, the PLDT DFON is equipped with N x 10 gigabits per second capacity and is connected directly to four existing international submarine cable systems. We use CS VEGA, a cable ship which we lease from NTT World Engineering Marine Corporation, or NTT-WEM, pursuant to a chartered arrangement maintenance contract to maintain the 2,400 kilometers of submarine cable comprising the submerged portion of our DFON. This seven-year maintenance contract, as extended, expired last December 31, 2007. We are currently renewing the contract with NTT-WEM on a monthly basis until such time that a new long-term maintenance contract is in place.
We are currently upgrading our fixed line facilities to NGN, a broad term for certain emerging computer network technologies that can encompass voice, data and video where all information is efficiently transmitted via digital packets of data. It is a platform that will allow for more services to be made available to our fixed line subscribers.
We provide international network services using our three international gateway switching exchanges. As at December 31, 2007, our international long distance facilities allow direct correspondence with 47 countries/territories (representing 87 correspondents) and can reach 460 foreign destinations (via direct and transited routes including breakouts) worldwide. We also own interests in submarine and satellite systems, through which we route most of our international traffic.
The table below shows the submarine cable systems in which we have interests and the countries or territories they link:
Additionally, on May 2, 2007, a consortium of seventeen major international telecommunication operators, including PLDT, signed an agreement to build the first high-bandwidth optical fiber submarine cable system linking Southeast Asia and the U.S. The cable project, known as the Asia-America Gateway, will span 20,000 kilometers and will use the latest Dense Wavelength Division Multiplexing technology to provide upgradeable, future proof transmission facilities that will support bandwidth requirements for new and revolutionary broadband applications. It is expected that the Asia-America Gateway will cost approximately US$500 million (of which US$50 million represents PLDTs investment) and will be ready for service by the first quarter of 2009.
Since the issuance of Executive Order No. 59 in 1993, which requires non-discriminatory interconnection of Philippine carriers' networks, we have entered into bilateral interconnection arrangements with other Philippine fixed line and cellular carriers.
Since January 1, 2004, calls terminating to cellular subscribers originating from fixed line subscribers are charged a termination rate of Php4.00 per minute.
Since January 1, 2004, local access for cellular operators, including Smart, that terminate calls to PLDTs fixed line network were charged at Php3.00 per minute.
Under a separate agreement between PLDT and PAPTELCO, PLDT is the transit facility provider between Smart, Globe, other local exchange carriers, or LEC, operators and PAPTELCO. PAPTELCO is comprised of 48 LEC and operating in 144 major telephone exchanges nationwide. Transit traffic is a service by PLDT to Smart, Globe, other LEC operators and PAPTELCO members where PAPTELCO members have no direct interconnection with either Smart, Globe and other LEC operators.
Since February 1, 2003, international calls terminating to PLDTs fixed line network were charged a termination rate of approximately US$0.12 per minute. Also, international calls terminating to Smarts cellular network were charged a termination rate of US$0.16 per minute.
Since January 1, 2002, Smart charged a termination rate of Php4.00 per minute for calls originating from/terminating to another cellular operators network. For SMS originating from Smart and terminating on other operators cellular network and for SMS originating from other operators and terminating on Smarts cellular network, the charge is Php0.35 per message.
PLDT, Smart and Piltel provide telecommunications services pursuant to legislative franchises that expire, in the case of PLDT, on November 28, 2028, in the case of Smart, on March 27, 2017 and, in the case of Piltel, on May 14, 2019. A franchise holder is required to obtain operating authority from the NTC to provide specific telecommunications services. These approvals may take the form of a Certificate of Public Convenience and Necessity, or CPCN, or, while an application for a CPCN is pending, a provisional authority to operate. Provisional authorities are typically granted for a period of 18 months. The Philippine Revised Administrative Code of 1987 provides that if the grantee of a license or permit, such as a CPCN or provisional authority, has made timely and sufficient application for the extension thereof, the existing CPCN or provisional authority will not expire until the application is finally decided upon by the administrative agency concerned.
PLDT operates its business pursuant to a number of provisional authorities and CPCNs, the terms of which will expire at various times between now and 2028. PLDT's CPCNs to provide services to most of the Metropolitan Manila area, Davao and other Philippine cities expired in 2003. Although some of PLDT's CPCNs and provisional authorities have already expired, PLDT filed timely applications for extension of these CPCNs and provisional authorities prior to their respective expiration dates and is therefore entitled to continue to conduct its business under its existing CPCNs and provisional authorities pending the NTCs decision on these extensions. PLDT expects that the NTC will grant these extensions; however, there can be no assurance that this will occur. The period of validity of some of PLDTs CPCNs which expired on November 28, 2003, coterminous with the term of its previous franchise under Republic Act No. 6146, has been extended further by the NTC to November 28, 2028, coterminous with PLDTs current franchise under Republic Act No. 7082. Motions to extend the period of validity of the other CPCNs to November 28, 2028 are currently pending with the NTC. See Item 3. Key Information Risks Factors Risks Relating to Us Our business is significantly affected by governmental laws and regulations, including regulations in respect of our franchises, rates and taxes.
Smart operates its cellular, international long distance and national long distance services pursuant to CPCNs, the terms of which will expire upon the expiration of its franchise. On July 22, 2002, Smart was granted separate CPCNs to operate a cellular mobile telephone system, or CMTS, and an international gateway facility. On August 26, 2002, Smart was granted a CPCN to install, operate and maintain nationwide global mobile personal communications via satellite which will also expire upon expiration of its franchise. On February 19, 2008, Smart was granted a CPCN to establish, install, maintain, lease and operate an international private leased circuit for a term that is co-terminus with the expiration of its franchise. Prior to that, Smart was permitted to engage in these activities pursuant to a provisional authority and a timely filed application for the grant of such CPCN. On the same date, upon application of Smart, the NTC extended Smarts provisional authority to construct, install, operate and maintain a nationwide public calling office and public payphone service from January 4, 2007 to January 4, 2010.
On December 29, 2005, Smart was awarded a 3G license by the NTC after being ranked highest in garnering a perfect score on a 30-point grading system designed to gauge the capability of telecommunication operators to effectively provide extensive 3G services. As a result, Smart received the largest radio frequency allocation of 15 MHz as well as first choice of frequency spectrum. Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrum. Smart is required to pay annual license fees of Php115 million based on the 15 MHz awarded to Smart.
Under the terms of the 3G license, Smart is required to:
• begin installation and rollout of its 3G network no later than 18 months from the date of the award;
• start commercial operations no later than 30 months from the date of the award; and
• cover at least 80% of provincial capitals and 80% of chartered cities within five years.
Piltel is authorized to provide virtually every type of telecommunications service, including the transmission of voice, data facsimile, audio and video and information services, in and between provinces, cities and municipalities throughout the Philippines. The franchise, which was last amended on May 14, 1992, will expire on May 14, 2019 and may be extended by a legislative act of the Philippine Congress.
The following table sets forth the spectrum system, licensed frequency and bandwidth used by Smart, Piltel and SBI:
* SBI frequency assignments on these bands are non-contiguous and on a per station and location basis.
Operators of international gateway facilities and cellular telephone operators, pursuant to Executive Order No. 109, are required to install a minimum number of local exchange lines. Of these new lines, operators are required to install one rural exchange line for every ten urban exchange lines installed. Smart and Piltel were required to install 700,000 and 400,000 lines, respectively, and each has received a certificate of compliance from the NTC.
PLDT, Smart and Piltel are required to pay various permit, regulation and supervision fees to the NTC. PLDT was previously engaged in disputes with the NTC over some of the assessed fees. For more information on the disputes involving PLDT, see Item 8. Financial Information Legal Proceedings NTC supervision and regulatory fees, or SRF.
Piltel is engaged in discussions with the NTC relating to the allocation and use of certain 3G radio frequency bands. On August 23, 2005, the NTC issued Memorandum Circular No. 07-08-2005 or the Rules and Regulations on the Allocation and Assignment of 3G Radio Frequency Bands, allocating the 825-845MHz/870-890MHz frequency band for 3G. In a letter dated December 8, 2005, Piltel informed the NTC of its intent to upgrade its existing CDMA CMTS network to 3G.
In a letter dated June 18, 2007, Piltel requested the NTC to affirm its right to use the said frequency band by allowing the joint use thereof by Smart and Piltel which was granted previously by NTC (through then Commissioner Rio) in a letter dated May 6, 2002, arguing that the re-allocation of the frequency band was done without due process; that Piltel had been complying with the mandates of the NTC and had been persistently applying for, and renewing, the Radio Station Licenses (RSLs); that it had been paying the spectrum users fees (SUF); and that the re-allocation of the frequency band for 3G renders inutile the RSLs with effectivity dates of up to June 30, 2008.
In a letter dated November 27, 2007, Piltel requested to use the 824-835MHz/869-880MHz frequency band for 3G services, with a commitment to submit pertinent documents, referring to its letter of December 8, 2005 on its intent to upgrade its existing CDMA CMTS network to 3G.
However, in its letter dated December 12, 2007, the NTC denied Piltels letter of November 27, 2007 citing that records showed that the radio frequencies 824-835MHz/869-880MHz had been re-allocated for International Mobile Telecommunications 2000 (IMT2000) or Third Generation (3G) Mobile Telecommunications Services under Memorandum Circular 07-08-2005 and that Piltel had not applied for the assignment and use of radio frequencies re-allocated for 3G Mobile Telecommunications Service nor was qualified for the assignment of the same.
In a letter dated December 19, 2007, Piltel requested reconsideration of the December 12, 2007 letter of the NTC, reiterating its commitment to submit necessary documents that may be required by the NTC. Piltels request for reconsideration remains pending with the NTC.
The Philippine Congress is considering two bills that relate to the imposition of franchise tax on telecoms companies. HB No. 1469 proposes to re-impose a 5% franchise tax on gross receipts on telephone and telegraph services in lieu of the VAT. HB No. 1560 proposes a franchise tax at the rate of 3.5% on the first year and 7% thereafter on the gross receipts of telecoms and broadcast companies, in lieu of the VAT. There are also various bills in Congress which propose to tax telecommunications services, among them, the imposition of a tax on mobile phone companies on all text entries to text games; the imposition of a Php0.50 specific tax on each SMS to be borne by the cellular phone companies; and the imposition of a 10% ad valorem tax on all cellular phone calls using 3G.
In order to diversify the ownership base of public utilities, the Public Telecommunications Policy Act (R.A. 7925) requires a telecommunications entity with regulated types of services to make a public offering through the stock exchanges representing at least 30% of its aggregate common shares by the later of the fifth anniversary of the date (a) the law became effective or (b) the entitys commencement of commercial operations.
PLDT and Piltel have complied with this requirement. However, Smart has not conducted a public offering of its shares. If Smart is found to be in violation of R.A. 7925, this could result in a revocation of the franchise of Smart and in the filing of a quo warranto case against Smart by the Office of the Solicitor General of the Philippines. See Item 3. Key Information Risk Factors The franchise of Smart may be revoked due to its failure to conduct a public offering of its shares for further discussion.
Including us, there are nine major local exchange carriers, seven international gateway facility providers and five cellular service providers in the country. Many new entrants into the Philippine telecommunications market have entered into strategic alliances with foreign telecommunications companies, which provide them access to technological and funding support as well as service innovations and marketing strategies. Consequently, we are facing increasing competition in major segments of the telecommunications industry, particularly data and other network services segments.
There are presently six operating service providers, namely Smart, Piltel, Globe, Innove, Digitel and Express Telecom, or Extelcom. Globe acquired Innove to form into one operating group while Smart and Piltel, both being part of the PLDT Group, formed another operating group. These two operating groups have approximately 92% of the Philippine cellular market. There are therefore effectively two large competitors in the Philippine cellular market. The third active operator, Digitel commenced its cellular service, Sun Cellular, on March 29, 2003 and is estimated to have approximately 8% of the cellular market as at December 31, 2007. Extelcom operates on an analog platform and is estimated to have minimal subscribers. In December 2005, the NTC awarded four out of five 3G licenses to existing cellular operators Smart, Globe, Digitel and to a new entrant, Connectivity Unlimited Resources Enterprises, or CURE. The NTC has yet to award a fifth license to another operator.
Competition in the cellular industry has intensified with the increased availability of affordably priced handsets offering a range of new functions and the introduction by competitors of new and improved plans for postpaid subscribers, reduced rates per minute and aggressive marketing and promotional strategies. The principal bases of competition are price, including handset cost, quality of service, network reliability, geographic coverage and attractiveness of packaged services. Smart's network leads the industry in terms of coverage with 7,825 base stations as at December 31, 2007.
As a result of competitive pressures, several service providers, including Smart and Piltel, have, in the last two years, introduced bucket plans providing unlimited voice and text services, and other promotions. The launch of Sun Cellulars 24/7 promotion stimulated a market segment that is attracted to bucket plans for voice and text services. Smart launched Smart 258, a registration-based service which offers unlimited on-networks text messaging in various load denominations with designated expiration periods. While most of the bucket priced plans currently available in the market are being offered on promotional bases, Smart, Globe and Sun Cellular continue to launch other services that are designed to encourage incremental usage from existing subscribers and also to attract new subscribers.
Cellular operators also compete actively in launching innovative products and value-added services. The growing range of cellular products and services include not only text messaging but also multi-media messaging, voice mail, text mail, international roaming, information-on-demand, mobile banking, e-commerce, mobile data, cellular internet access and internet messaging.
On February 14, 2006, Smart opened its 3G network in selected key cities nationwide, making video calling, video streaming, high speed internet browsing and special 3G content downloads on its 3G network available to subscribers with 3G handsets. Likewise, Globe is currently rolling out its 3G network.
Consistent with industry practice and Smarts churn management efforts, Smart "locks" the handsets it sells to its subscribers, rendering them incompatible with SIM cards issued by competitors and thereby hindering them from swapping the existing SIM for a SIM of a competing operator. However, subscribers can have their handsets unlocked by unauthorized parties for a nominal fee and purchase new SIM cards from competing operators. Unlocking does not involve significant cost. Switching to another cellular operator would, however, result in a change of the subscribers cellular telephone number.
In order to avail themselves of promotions and cost efficient network-to-network calling rates, cellular subscribers in the Philippines have increasingly been subscribing to the services of multiple wireless operators. As a result, the increases in 2007 in our cellular subscriber base and the penetration rate of the wireless market in the Philippines partly was impacted by such multiple SIM card ownership.
Local Exchange Service
The concerted nationwide local exchange line build-out by various players, as mandated by the Philippine government, significantly increased the number of fixed line subscribers in the country and resulted in wider access to basic telephone service. The growth of the fixed line market, however, remained weak due to the surge in demand for cellular services and, in the past, the general sluggishness of the national economy. Nevertheless, we have sustained our leading position in the fixed line market on account of PLDT's extensive network in key cities nationwide. In most areas, we face one or two competitors. Our principal competitors in the local exchange market are Digitel, Bayan Telecommunications and Globe, which provide local exchange service through fixed wireless landline services.
There are currently four major fixed wireless landline services in the market that adopt the look and feel of a cellular phone service but provide the same tariff structure of a fixed line service such as the charging of monthly service fees. The earliest such service was provided by Digitel in the fourth quarter of 2005 at a fixed monthly rate of Php672. This service is provided mostly in selected areas of Southern and Northern Luzon where Digitel was lacking fixed cable facilities. Globe quickly followed suite with a similar service at a monthly rate of Php995 which service bundled a wireless landline and broadband internet connection of 384kbps. This service is offered in limited areas of Metro Manila like Makati, Las Piñas, the Visayas region and selected areas of Southern Luzon like Cavite and Batangas.
The most aggressive service of this type was launched by BayanTel in the second half of 2006, which service maintains two major price points open to both residential and business subscribers. This service is available under two plans, a plan at a monthly rate of Php699 for customers in Metro Manila and a plan at a monthly rate of Php599 for customers in selected regional areas of the Philippines.
In March 2007, we launched the PLDT Landline Plus, a postpaid and prepaid fixed wireless service which was initially available only in regional areas where there were no available PLDT fixed cable facilities, at a flat monthly rate of Php499, and which was subsequently extended to other areas, including Metro Manila, and increased to a monthly rate of Php600 for residential and Php1,000 for business subscribers.
International Long Distance Service
Including us, there are 11 licensed international gateway facility operators in the country. While we have so far been able to maintain a leadership position in this highly competitive segment of the industry, in recent years, our market share has reduced largely as a result of (1) competition from other international gateway facility operators and illegal international simple resale operators; (2) an increase in inbound and outbound international long distance calls terminating to and originating from the growing number of cellular subscribers; and (3) the popularity of alternative and cheaper modes of communication such as text messaging, e-mail, internet telephony and the establishment of VPNs for several corporate entities, further heightening the competition.
With respect to outbound calls from the Philippines, we compete for market share through our local exchange and cellular businesses, which are the origination points of outbound international calls. We have also introduced a number of marketing initiatives to stimulate growth of outbound call volumes, including tariff reductions and volume discounts for large corporate subscribers. Digitel and Globe have also launched new pricing schemes to grow their outbound call volumes.
With respect to inbound calls into the Philippines, we have been pursuing a number of initiatives to strengthen our inbound telecommunications traffic, including lowering our termination rates and identifying and limiting unauthorized traffic termination. In addition, we have also established, through our wholly-owned subsidiary PLDT Global, presence in key cities overseas to identify and capture Philippine terminating traffic at its source, maximize the use of our international facilities and develop alternative sources of revenue.
National Long Distance Service
Our national long distance service business has been negatively affected by the growing number of cellular subscribers in the Philippines and the widespread availability and growing popularity of alternative economical non-voice methods of communication, particularly text messaging and e-mail. In addition, various ISPs have launched voice services via the net to their subscribers nationwide.
While national long distance call volumes have been declining, we have remained a leading provider of national long distance service in the Philippines due to our significant subscriber base and ownership of the Philippines most extensive transmission network.
PLDT launches from time to time promotions bundled with our other products to attract new subscribers, including free PLDT-to-PLDT NDD service.
Data and Other Network Services
Another rapidly growing segment of the industry is the market for data and other network services. The growth is spurred by the significant growth in consumer/retail narrowband and broadband internet access, enterprise resource planning applications, customer interaction services, knowledge processing solutions, on-line gaming and other e-services that drive the need for broadband and internet-protocol based solutions both here and abroad. Our major competitors in this area are Globe/Innove, Bayan Telecommunications, Eastern Telecoms and Digitel. The principal bases of competition in data services market are coverage, price/value for money, bundles or free gifts, customer service and quality of service.
We have not been subject to any material fines or legal or regulatory action involving non-compliance with environmental regulations of the Philippines. We are not aware that we are not in compliance in any material respect with relevant environmental protection regulations.
We do not own any material intellectual property rights apart from our brand names and logos. We are not dependent on patents, licenses or other intellectual property which are material to our business or results of operations, other than licenses to use the software that accompany most of our equipment purchases.
We own four office buildings located in Makati City and own and operate 228 exchanges nationwide, of which 48 are located in the Metropolitan Manila area. The remaining 180 exchanges are located in cities and small municipalities outside Metropolitan Manila area. We also own radio transmitting and receiving equipment used for international and domestic communications. As at December 31, 2007, we had 5,001 cellular cell sites and 7,825 base stations.
As at December 31, 2007, our principal properties, excluding property under construction, consisted of the following, based on net book values:
• 67% consisted of cable, wire and cellular facilities, including our domestic fiber optic network, subscriber cable facilities, inter-office trunking and toll cable facilities and cellular facilities;
• 17% consisted of central office equipment, including three international gateway facilities, six pure national toll exchanges and 15 combined local and toll exchanges, and our communications satellite;
• 11% consisted of land and improvements and buildings, which we acquired to house our telecommunications equipment, personnel, inventory and/or fleet;
• 1% consisted of information origination and termination equipment, including pay telephones and radio equipment installed for customers use, and cables and wires installed within customers' premises; and
• 4% consisted of other work equipment.
For more information on these properties, see Note 8 Property, Plant and Equipment to the accompanying audited consolidated financial statements in Item 18.
These properties are located in areas where our subscribers are being served. In our opinion, these properties are in good condition, except for ordinary wear and tear, and are adequately insured.
The majority of our connecting lines are above or under public streets and properties owned by others.
PLDT's, Smarts and Piltels properties are free from any mortgage, charge, pledge, lien or encumbrance; however, substantial properties of Mabuhay Satellite are subject to liens while a portion of ePLDTs property is subject to liens.
On February 1, 2008, SBI completed the acquisition of certain assets from Cruz Telephone Company, Inc., or Cruztelco, a local exchange operator offering fixed line services in North Eastern Mindanao. Please see Note 8 Property, Plant and Equipment SBIs Acquisition of Cluster 3 Assets from Cruz Telephone Company, Inc., or Cruztelco in the accompanying audited consolidated financial statements in Item 18 for further discussion.
PLDT has various long-term lease contracts, the bulk of which have lease terms ranging from two to ten years covering certain offices, warehouses, telecommunications equipment locations and various office equipment.
For more information on the obligations relating to these properties and long-term obligations, see Note 24 Contractual Obligations and Commercial Commitments to the accompanying audited consolidated financial statements in Item 18.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements (and the related notes) as at and for the years ended December 31, 2007 and 2006 included elsewhere in this report. This discussion contains forward-looking statements that reflect our current views with respect to future events and our future financial performance. These statements involve risks and uncertainties, and our actual results may differ materially from those anticipated in these forward-looking statements as a result of particular factors such as those set forth under "Forward-Looking Statements" and Item 3. "Key Information Risk Factors" and elsewhere in this report. Our audited consolidated financial statements, and the financial information discussed below, have been prepared in accordance with IFRS. Since these are our first consolidated financial statements prepared in accordance with IFRS, pursuant to the transitional relief granted by the SEC in respect of the first-time adoption of IFRS, the following is limited to a discussion of our financial condition and results of operations for the years ended December 31, 2007 and 2006, and no comparative data for the year ended December 31, 2005 have been included. For further details, please see Presentation of Financial Information above. For convenience, certain peso financial information in the following discussions has been translated to U.S. dollars at the exchange rate at December 31, 2007 of Php41.411 to US$1.00, as quoted through the Philippine Dealing System.
We are the largest and most diversified telecommunications company in the Philippines. We have organized our business into three main segments which serve as the basis for managements decision to allocate resources and evaluate operating performance:
• Wireless wireless telecommunications services provided through our cellular service providers namely, Smart and Piltel, SBI, our wireless broadband provider, and Wolfpac, our wireless content operator, and Mabuhay Satellite and ACeS Philippines, our wireless broadband satellite and other service operators;
• Fixed Line fixed line telecommunications services primarily provided through PLDT. We also provide fixed line services through PLDTs subsidiaries ClarkTel, SubicTel, Maratel, Piltel and BCC, PLDT Global and SNMI, which together account for approximately 3% of our consolidated fixed line subscribers; and
• Information and Communications Technology information and communications infrastructure and services for internet applications, internet protocol-based solutions and multimedia content delivery provided by ePLDT; customer interaction services provided under the umbrella brand name ePLDT Ventus, including Ventus, Parlance and Vocativ; knowledge processing solutions services provided through the SPi Group (consolidated since July 11, 2006); and internet access and online gaming services provided by ePLDTs subsidiaries Infocom, Digital Paradise, Digital Paradise Thailand, netGames, Airborne Access and Level Up!, as discussed in Note 9 Investments in Associates and Joint Ventures to the accompanying audited consolidated financial statements in Item 18.
Key performance indicators and drivers that our management uses for the management of our business include, among others, the general economic conditions in the Philippines, our subscriber base, traffic volumes, and interconnection arrangements.
We provide cellular and wireless broadband, satellite and other services under our wireless business, with cellular services contributing about 95% and the remaining wireless services contributing approximately 5% of our wireless service revenues, respectively, in 2007. Rapid growth in the cellular market has resulted in a change in our revenue composition and sources of our revenue growth. Starting in 2003, cellular service has been our major revenue source surpassing fixed line revenues. As at December 31, 2007, Smart and Piltel, which offers services using Smarts network, had the largest and third largest cellular subscriber bases, respectively, in the Philippines. In 2007, Smarts and Piltels subscribers increased by 24%, resulting in our aggregate system-wide cellular subscribers outnumbering our fixed line in service by more than 17 to 1 at the end of 2007. However, while our cellular subscriber base continued to increase in 2007, this increase was partly impacted by multiple-SIM card ownership, in which subscribers subscribe to our services in addition to having subscriber arrangements with other wireless operators, and our continued expansion in the lower income segment of the Philippine wireless market, which overall resulted in a decrease in our average revenue per user, or ARPU. Cellular data services, which include all text messaging and text-related services ranging from ordinary text to value-added services, contributed significantly to our cellular revenue increase. Our total wireless revenues in 2007 increased by 12% from 2006 and accounted for 58% and 56%, respectively, of our total revenues for each of the years ended December 31, 2007 and 2006.
Our fixed line business provides local exchange service, international and national long distance services, data and other network services and miscellaneous services. Our total fixed line revenues accounted for 35% and 39% of our total revenues for the years ended December 31, 2007 and 2006, respectively. Local exchange and international long distance revenues have declined primarily due to the appreciation of the Philippine peso to the U.S. dollar. National long distance revenues have also been declining largely due to a drop in call volumes as a result of alternative means of communications such as texting, e-mailing and internet telephony. Mitigating these declines was the steady growth of our data and other network services over the recent years. Recognizing the growth potential of the data and other network services segment, we have put considerable emphasis on the development of new packet-switched, data-capable and IP-based networks.
Information and Communications Technology
We conduct our ICT businesses through ePLDT. ePLDTs principal businesses are the operation of an internet data center under the brand name VitroTM; customer interaction service businesses, including Ventus, Vocativ and Parlance, under the brand name ePLDT Ventus; knowledge processing solutions provided by SPi; internet and online gaming through Infocom, Digital Paradise and Digital Paradise Thailand, netGames, Level Up! and Airborne Access. The revenue contribution of our information and communications technology segment accounted for 7% and 5% of our total revenues for the years ended December 31, 2007 and 2006, respectively. The increase in the revenue contribution from our information and communication technology segment was primarily due to the results of the full-year consolidation of the financial results of the SPi Group in 2007.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with IFRS requires us to make judgments, estimates and assumptions that affect the reported amounts of our revenues, expenses, assets and liabilities and disclosure of contingent liabilities at the reporting date. Due to uncertainties inherent in these assumptions and estimates, actual results and outcomes could differ from our assumptions and estimates. We believe the following represent our critical accounting policies under IFRS. The impact and any associated risks relating to these policies in our business operations are discussed elsewhere in this section.
We have various lease agreements as a lessee in respect of our certain equipment and properties. We evaluate whether significant risks and rewards of ownership of the leased properties are transferred to us or retained at the lessor based on IAS 17, Leases, which requires us to make judgments and estimates of transfer of risks and rewards of ownership. Total lease expense arising from operating leases amounted to Php2,762 million and Php2,257 million for the years ended December 31, 2007 and 2006, respectively. Total finance lease obligations as at December 31, 2007 and 2006 amounted to Php496 million and Php1,030, respectively. See Note 18 Interest-bearing Financial Liabilities, Note 24 Contractual Obligations and Commercial Commitments and Note 26 Financial Assets and Liabilities to the accompanying audited consolidated financial statements in Item 18.
Determination of fair values of financial assets and liabilities
We carry certain of our financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgments for the fair values of financial assets and liabilities. In addition, certain liabilities acquired through debt exchange and restructuring are required to be carried at fair value at the time of the debt exchange and restructuring. See Note 26 Financial Assets and Liabilities to the accompanying audited consolidated financial statements in Item 18. While significant components of fair value measurement were determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates and volatility rates), the amount of changes in fair value would differ if we utilized a different valuation methodology. Any change in fair value of these financial assets and liabilities would directly affect our consolidated statement of income and consolidated statement of changes in equity.
Total fair value of financial assets and liabilities as at December 31, 2007 amounted to Php46,661 million and Php111,086 million, respectively, while the total fair value of financial assets and liabilities as at December 31, 2006 amounted to Php36,517 million and Php124,801 million, respectively. See Note 26 Financial Assets and Liabilities to the accompanying audited consolidated financial statements in Item 18.
We are currently involved in various legal proceedings. Our estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling our defense in these matters and is based upon an analysis of potential results. We currently do not believe these proceedings will have a material adverse effect on our consolidated financial statements. It is possible, however, that future results of operations could be materially affected by changes in our estimates or in the effectiveness of our strategies relating to these proceedings. See Note 25 Provisions and Contingencies to the accompanying audited consolidated financial statements in Item 18.
Estimating useful lives of property, plant and equipment
We estimate the useful lives of our property, plant and equipment based on the periods over which our assets are expected to be available for use. Our estimation of the useful lives of our property, plant and equipment is based on our collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful lives of our property, plant and equipment are reviewed at least at each financial year-end and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limitations on the use of our assets. It is possible, however, that future results of operations could be materially affected by changes in our estimates brought about by changes in the factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of our property, plant and equipment would increase our recorded operating expenses and decrease our noncurrent assets.
We recognized additional depreciation charges of Php796 million and Php8,624 million in 2007 and 2006, respectively, due to a change in the estimated useful lives of certain of our network assets owing to continuing network upgrade and expansion. The acceleration of depreciation is expected to result in reduction of future monthly depreciation amounting to Php10 million going forward.
Total carrying values of property, plant and equipment, net of accumulated depreciation and amortization amounted to Php159,414 million and Php164,190 million as at December 31, 2007 and 2006, respectively. See Note 8 Property, Plant and Equipment and Note 26 Financial Assets and Liabilities to the accompanying audited consolidated financial statements in Item 18.
Goodwill and intangible assets
Our consolidated financial statements and results of operations reflect acquired businesses after the completion of the respective acquisition. We account for the acquired businesses using the purchase method of accounting which requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market values of the acquirees identifiable assets and liabilities at the acquisition date. Any excess in the purchase price over the estimated fair market values of the net assets/liabilities acquired is recorded as goodwill in the balance sheet. Our business acquisitions have resulted in goodwill and intangible assets, which are subject to periodic impairment test and amortization, respectively. See Note 11 Goodwill and Intangible Assets to the accompanying audited consolidated financial statements in Item 18. Thus, the numerous judgments made in estimating the fair market value to be assigned to the acquirees assets and liabilities can materially affect our results of operations.
Total carrying values of goodwill and intangible assets as at December 31, 2007 and 2006 amounted to Php11,721 million and Php12,214 million, respectively.
Realizability of deferred income tax assets
We review the carrying amounts of deferred income tax assets at each balance sheet date and reduce these to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred income tax assets to be utilized. Our assessment on the recognition of deferred income tax assets on deductible temporary differences is based on the level and timing of forecasted taxable income of the subsequent reporting periods. This forecast is based on our past results and future expectations on revenues and expenses as well as future tax planning strategies. However, there is no assurance that we will generate sufficient taxable income to allow all or part of our deferred income tax assets to be utilized.
Based on the above assessment, we have not recognized certain of our deferred income tax assets as at December 31, 2007 and 2006 amounting to Php1,122 million and Php299 million, respectively. Total deferred tax assets as at December 31, 2007 and 2006 amounted to Php13,757 million and Php20,538 million, respectively, while total deferred tax liabilities as at December 31, 2007 and 2006 amounted to Php2,066 million and Php402 million, respectively. See Note 6 Income Tax to the accompanying audited consolidated financial statements in Item 18.
Estimating allowance for doubtful accounts
We estimate the allowance for doubtful accounts related to our trade receivables that are specifically identified as doubtful of collection. The level of allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. In these cases, we use judgment based on the best available facts and circumstances, including but not limited to, the length of our relationship with the customer and the customers credit status based on third party credit reports and known market factors, to record specific reserves for customers against amounts due in order to reduce our receivables to amounts that we expect to collect. These specific reserves are re-evaluated and adjusted as additional information received affect the amounts estimated.
In addition to specific allowance against individually significant receivables, we also assess a collective impairment allowance against credit exposures of our customer which were grouped based on common credit characteristic, which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when the receivables were originally granted to customers. This collective allowance is based on historical loss experience using various factors such as historical performance of the customers within the collective group, deterioration in the markets in which the customers operate, and identified structural weaknesses or deterioration in the cash flows of customers.
Impairment provision for receivable recognized in consolidated statements of income amounted to Php417 million and Php736 million for the years ended December 31, 2007 and 2006, respectively. Trade and other receivables, net of impairment, amounted to Php12,645 million and Php10,158 million as at December 31, 2007 and 2006, respectively. See Note 5 Income and Expenses, Note 14 Trade and Other Receivables and Note 26 Financial Assets and Liabilities to the accompanying audited consolidated financial statements in Item 18.
Estimation of pension cost and other retirement benefits
The determination of our obligation and cost for pension and other retirement benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 23 Share-based Payments and Employee Benefits to the accompanying audited consolidated financial statements in Item 18 and include, among other things, discount rates, expected returns on plan assets and rates of compensation increases. Actual results that differ from our assumptions are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceed 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. While we believe that our assumptions are reasonable and appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other retirement obligations. Total pension benefit costs amounted to Php1,773 million and Php1,003 million for the years ended December 31, 2007 and 2006, respectively.
Unrecognized net actuarial gain as at December 31, 2007 amounted to Php1,344 million and unrecognized net actuarial loss as at December 31, 2006 amounted to Php4,657 million. The accrued benefit costs as at December 31, 2007 and 2006 amounted to Php2,985 million and Php2,888 million, respectively. See Note 23 Share-based Payments and Employee Benefits to the accompanying audited consolidated financial statements in Item 18.
Share-based payment transactions
Our long-term incentive plan, or LTIP, grants share appreciation rights, or SARs, to our eligible key executives and advisors. Under the LTIP, we recognize the services we receive from the eligible key executives and advisors, and our liability to pay for those services, as the eligible key executives and advisors render services during the vesting period. We measure our liability, initially and at each reporting date until settled, at the fair value of the SARs, by applying an option valuation model, taking into account the terms and conditions on which the SARs were granted, and the extent to which the eligible key executives and advisors have rendered service to date. We recognize any changes in fair value at each reporting date until settled, in the results of operations for the year. The assumptions and estimates are described in Note 23 Share-based Payments and Employee Benefits to the accompanying audited consolidated financial statements in Item 18 and include, among other things, annual stock volatility, risk free interest rate, remaining life, and the fair value of common stock. While management believes that the assumptions and estimates used are reasonable and appropriate, significant differences in our actual experience or significant changes in the assumptions may materially affect the stock compensation costs charged to operations. The fair value of the LTIP recognized as an expense for the years ended December 31, 2007 and 2006 amounted to Php1,448 million and Php3,150 million, respectively. As at December 31, 2007 and 2006, outstanding LTIP liability amounted to Php1,494 million and Php5,030 million, respectively. See Note 5 Income and Expenses and Note 23 Share-based Payments and Employee Benefits to the accompanying audited consolidated financial statements in Item 18.
IFRS requires that an impairment review be performed when certain impairment indicators are present. In the case of goodwill, at a minimum, such asset is subject to an annual impairment test and more frequently whenever there is an indication that such asset may be impaired. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires us to make an estimate of the expected future cash flows from the cash-generating unit and to choose a suitable discount rate in order to calculate the present value of those cash flows.
Determining the fair values of property, plant and equipment, investments and intangible assets, which requires the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires us to make estimates and assumptions that can materially affect our consolidated financial statements. Future events could cause us to conclude that property, plant and equipment, investments and intangible assets associated with an acquired business are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
The preparation of estimated future cash flows involves significant judgments and estimations. While we believe that our assumptions are appropriate and reasonable, significant changes in our assumptions may materially affect our assessment of recoverable values and may lead to future additional impairment charges under IFRS. Total impairment charges for the years ended December 31, 2007 and 2006 amounted to Php1,317 million and Php2,766 million, respectively. See Note 4 Segment Information and Note 5 Income and Expenses to the accompanying audited consolidated financial statements in Item 18.
The carrying value of our property, plant and equipment, investments in associates, goodwill and intangible assets, trade and other receivables and inventories and supplies are separately disclosed in Notes 8, 9, 11, 14 and 15 to the accompanying audited consolidated financial statements in Item 18, respectively.
Our revenue recognition policies require us to make use of estimates and assumptions that may affect the reported amounts of our revenues and receivables.
Our agreements with domestic and foreign carriers for inbound and outbound traffic subject to settlements require traffic reconciliations before actual settlement is done, which may not be the actual volume of traffic as measured by us. Initial recognition of revenues is based on our observed traffic adjusted by our normal experience adjustments, which historically are not material to our consolidated financial statements. Differences between the amounts initially recognized and the actual settlements are taken up in the accounts upon reconciliation. However, there is no assurance that such use of estimates will not result in material adjustments in future periods.
Revenues under a multiple element arrangement specifically applicable to our wireless business are split into separately identifiable components and recognized when the related components are delivered in order to reflect the substance of the transaction. The fair value of components is determined using verifiable objective evidence.
Under certain arrangements with our knowledge processing solutions services, if there is uncertainty regarding the outcome of the transaction for which service was rendered, revenue is recognized only to the extent of expenses incurred for rendering the service and such amount is determined to be recoverable.
New Accounting Pronouncements Effective Subsequent to 2007
Please see Note 2 Summary of Significant Accounting Policies and Practices to the accompanying audited consolidated financial statements in Item 18 for a discussion of new accounting standards that will become effective subsequent to December 31, 2007 and their anticipated impact on our consolidated financial statements.
The following table shows the contribution by each of our business segments to our total revenues, expenses and net income (loss) for each of the years ended December 31, 2007 and 2006. Most of our revenues are derived from our operations within the Philippines. Our revenues derived from outside the Philippines consist primarily of revenues from incoming international calls to the Philippines.
2007 Compared to 2006
On a Consolidated Basis
Our total revenues for 2007 increased by Php12,138 million, or 9%, to Php151,862 million from Php139,724 million in 2006. This increase was primarily due to (i) an increase in our service revenues primarily resulting from the continued growth of our wireless business and an increase in our ICT revenues largely due to the effects of the full-year consolidation of the financial results of SPi, CyMed and Level Up! and the continued increase in our customer interaction service revenues, which was partially offset by a continued decrease in our fixed line revenues; and (ii) an increase in foreign exchange gains, primarily due to the effect of foreign exchange revaluation as a result of the higher level of appreciation of the Philippine peso in 2007, which was partially offset by a decrease in our other income primarily resulting from a recognition in 2006 in our fixed line business of a net reversal of provision for onerous contract related to the ATPA with AIL. The revenue contribution of our wireless business accounted for 62% and 60% of our total revenues for 2007 and 2006, respectively.
The following table shows the breakdown of our total revenues for the years ended December 31, 2007 and 2006 by business segment:
Our total expenses in 2007 decreased by Php7,694 million, or 8%, to Php93,781 million from Php101,475 million in 2006. This decrease was primarly due to lower financing costs on account of lower accretion of financial liabilities complemented by lower loss on derivative transactions and loans and related items and lower depreciation and amortization, which was partially offset by an increase in professional and other contracted services and compensation and employee benefits. As a percentage of our total revenues, total expenses decreased to 62% in 2007 from 73% in 2006.
The following table shows the breakdown of our total expenses for the years ended December 31, 2007 and 2006 by business segment:
Provision for Income Tax
Provision for income tax increased by Php13,139 million, or 232%, to Php18,807 million in 2007 compared to Php5,668 million in 2006 mainly due to the reversal in 2006 of a valuation allowance of deferred tax assets in relation to the likelihood that Piltel would be able to realize the future benefits on these assets in 2006 and lower accelerated depreciation recognized in 2007.
Consolidated Net Income
As a result, our consolidated net income in 2007 was Php39,274 million, an increase of Php6,693 million, or 21%, compared to Php32,581 million in 2006. The following table shows the breakdown of our consolidated net income for the years ended December 31, 2007 and 2006 by business segment:
On Business Segment Basis
Our wireless business segment offers cellular services as well as wireless broadband, satellite and other services.
The following table summarizes our total revenues from our wireless business for the years ended December 31, 2007 and 2006 by service segment:
Our wireless service revenues increased by Php8,102 million, or 10%, to Php86,497 million in 2007 compared to Php78,395 million in 2006, mainly as a result of the continued growth in the cellular and wireless broadband subscriber base, an increase in inbound international traffic and inbound roaming revenues, partially offset by an increase in interconnection costs and the unfavorable effect of the appreciation of the Philippine peso on our dollar-linked revenues. As a percentage of our total wireless revenues, service revenues contributed 92% in 2007 as compared to 93% in 2006.
Unless otherwise indicated, the financial data and operating metrics cited in the cellular service section reflect the consolidated results of our cellular subsidiaries, Smart and Piltel.
Our cellular service revenues consist of: (i) revenues derived from actual usage of the network by prepaid subscribers and any unused peso value of expired prepaid cards or electronic air time loads, net of content costs and discounts given to dealers and retailers; (ii) monthly service fees from postpaid subscribers, including: (a) toll charges for national and international long distance calls; (b) charges for calls and text messages in excess of allocated free local calls and text messages, respectively; and (c) charges for value-added services, net of related content provider costs; (iii) revenues generated from incoming calls and messages to our subscribers, net of interconnection expenses, fees from reciprocal traffic from international correspondents, and revenues from inbound international roaming services; and (iv) other charges, including those for reconnection and migration.
Our cellular service revenues in 2007 amounted to Php82,334 million, an increase of Php6,717 million, or 9%, from Php75,617 million in 2006. Cellular service revenues accounted for 95% of our wireless service revenues in 2007 as compared to 96% in 2006. The increase in cellular service revenues was primarily due to the continued growth of Smarts and Piltels subscriber base. As at December 31, 2007, Smart and Piltel cellular subscribers totaled 30,041,030, an increase of 5,865,646, or 24%, over their combined cellular subscriber base of 24,175,384 as at December 31, 2006. However, while our cellular subscriber base continued to increase in 2007, this increase was partly impacted by multiple-SIM card ownership, in which subscribers subscribe to our services in addition to having subscriber arrangements with other wireless operators, and our continued expansion in the lower income segment of the Philippine wireless market, which overall resulted in a decrease in our average revenue per user, or ARPU. While our combined cellular subscriber base continued to increase in the first two months of 2008 and reached 31,130,236 as at February 29, 2008, we expect that our combined cellular subscriber base in 2008 will increase at a lower pace than in previous years and that such increase will continue to be partly impacted by multiple-SIM card ownership and our continued expansion in the lower income segment of the Philippine wireless market.
The table below shows our cellular subscribers base as at December 31, 2007 and 2006:
Of our 30,041,030 subscribers as at December 31, 2007, prepaid subscribers accounted for approximately 99% while postpaid subscribers accounted for the remaining 1%. Our cellular prepaid subscriber base grew by 24% to 29,699,150 as at December 31, 2007 from 23,856,821 as at December 31, 2006, whereas our postpaid subscriber base increased by 7% to 341,880 as at December 31, 2007 from 318,563 as at December 31, 2006. Smarts prepaid and postpaid net subscriber activations totaled 3,114,882 and 23,317, respectively, in 2007, or a quarterly average addition of 778,721 prepaid and 5,829 postpaid subscribers. On the other hand, Piltels prepaid subscribers increased by 39% to 9,701,826 as at December 31, 2007 from 6,974,379 as at December 31, 2006, or a quarterly average addition of 681,862 subscribers. Postpaid subscribers as at December 31, 2007 were higher than as at December 31, 2006 primarily due to increased net activations in the last two quarters of 2007.
Our quarterly net subscriber activations over the eight quarters in 2007 and 2006 are as follows: